D-Day for Debit Cards (That's D as in "Durbin")

For people with debit cards, Wednesday is The Big Day. Finally, after a year-long, multi-million-dollar fight between big banks and big retailers, the Federal Reserve will announce its new rules for debit card swipe fees.

It could be the end of the debit card as we know it.

“This will be a game changer,” says Gerri Detweiler, Credit.com’s consumer credit expert. “Depending on what comes out, it could make a major difference for what our debit cards look like in the future.”

Every time you buy something with a debit card, the bank that issued the card gets a swipe fee, known as an “interchange fee” in bank-ese. Right now, the average fee is about 44 cents. The store pays the fee by tacking it onto the price of everything you buy. The fees have grown steadily over the last decade, according to the Federal Reserve.

[Related Articles: The Durbin Amendment]

For years, big retailers including 7-Eleven and Walmart have fought those rising fees. They argue that the fees amount to extortion, since Visa, MasterCard and the small number of big banks that issue most of the debit cards in this country use their dominance of the industry to charge whatever they want, adding up to over $1 billion a month in unnecessary debit fees.

“The debit card industry is broken,” says Mallory Duncan, chief attorney for the National Retail Federation. “They’re charging these outrageous, unnecessary fees, not because they need to, but because they can.”

The banks and card networks fought back, arguing that the debit card networks brought retailers countless new customers and sales, while decreasing their risk of theft and fraud.

And now, the banks argue, the retailers don’t want to pay for it.

“The retailers don’t want to pay their fair share of this system,” says Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents the big banks and the credit card networks. “They want us, the consumer, to pay for it. And that’s not fair.”

Congress listened to the merchants. Last summer Senator Dick Durbin (D-IL) wrote the Durbin amendment to the Dodd-Frank financial reform law. The amendment required the Federal Reserve to write new rules that would cap swipe fees. The Fed came back with a cap of 12 cents, a whopping 73% cut from the current average.

The banks, to say the least, were not happy. They unleashed a massive campaign to overturn or delay the Durbin amendment—a campaign so big that some in Washington dubbed it the “Lobbyist Full Employment Program.” But between Democratic control of the Senate and the White House, and a tight deadline set by Dodd-Frank to begin enforcement, the banks lost the battle. (Though perhaps not the war. After their proposal to delay the Durbin amendment by a year failed, bank leaders vowed to pursue other means, including more pressure on the Fed, to limit the rule’s impact.)

Regardless of the banks’ efforts, the Fed’s announcement still will likely be a watershed moment for people with debit cards. In recent decades consumers have come to expect a free debit card tied to their checking or savings account as standard. But now that the cards may earn banks significantly less money, banks have warned that they may change some things.

Because of Durbin, the debit card of the future may come only after consumers open accounts with high minimum balances, or once they have multiple accounts with the same bank. Some banks may try to replace free debit cards with prepaid ones, which come with many different up-front and continuing fees.

“I don’t think debit cards are going away,” Detweiler says. “It could mean that debit cards become more expensive, or it could mean that we see more issuers moving toward prepaid cards, or that debit cards become more closely tied to other financial products.”

Image: Dan Smith, via Wikimedia Commons