Debit Card Fee Changes: Winners and Losers

Last summer, when Congress passed the financial reform bill, Washington’s finest had a specific order for the Federal Reserve.

Start chopping away at debit card interchange fees.

Those are the fees that credit card companies charge retailers when consumers swipe or wave their debit cards at the counter to buy a Slurpie at 7-11 or that tennis bracelet at Tiffany’s.

It’s big money for banks and credit card providers. According to Federal Reserve figures , the average interchange fee is pegged between .44 cents and .56 cents per transaction, or roughly 1.14% and 1.53% per transaction. Furthermore, interchange fees racked up around $16 billion for 2009, alone.

Those days are over – or they will be by next July. The Federal Reserve has two new proposals on the table. Both cap debit card interchange fees, one at .7 cents per transaction and the other at .12 cents per transaction. The Fed has put both proposals out for comment, with a February 20, 2011 deadline.

The Federal Reserve is expected to act on the proposals by July, 2011. Most political observers say either proposal will likely to pass after final review by the Fed.

The Federal Reserve proposal comes into play as debit card usage is skyrocketing. The Federal Reserve Bank of Philadelphia reports that the annual number of paper checks dropped from 40 billion in 2000 to 30 billion in 2006 – a trend the Fed says is accelerating. Simultaneously, the use of debit cards has risen each year by an average of 17%, from 2000 through 2008.

So, with billions of dollars on the table, who wins and who loses with the new debit card fee rules? Here’s a quick list:

WINNERS

Retailers and small businesses – Both industries come out way ahead on the new debt card fee caps. The Federal Reserve estimates that businesses which accept debit card payments will save 70%-and-90% (depending on what statistics you’re reading) on debit card fee charges once the new rules are in place.

Online businesses – Companies that sell goods and services via the Internet will make out, too. They’ll pay less in debit card fees, as well. For an industry that doesn’t accept cash, lower debit card fees is a huge windfall.

U.S. Consumers – For once, Main Street beats Wall Street in the financial regulations game. After watching fat cat bankers pocket tens of billions in taxpayer bailout cash, consumers should see lower prices at the checkout counter, as retailers pass on at least some of the debit card fee savings to the public. Consumers will also benefit from not having to use ATM machines – a fact of life at smaller retailers who set minimum amount purchase levels for debit card users. Those limits should go away once the rules are in place. A few potential downsides here. Banks may start charging customers to use debit cards to make up for lost revenue. They may also decide to curb or even end rewards programs linked to debit cards.

LOSERS

Banks – A common refrain in bank boardrooms these days is “ugh”. How else should bankers react from losing billions in debit card fees? Banks can try to convert customers to credit cards, with added incentives, but good luck with that. Data shows that consumers prefer debit cards over credit cards, and once they figure out goods and services cost less when they use debit cards, all bets are off.

Credit card providers – Debit cards are serious business to credit card giants like Visa and Mastercard – debit card fees are the fastest-growing part of their businesses. Visa, for example, earns about 20% of its total revenues from debit card fees. Investors certainly understood the ramifications of the Federal Reserve proposals after they were released. Stock prices in both companies dropped by 10% within 24 hours. There’s more bad news for the credit card giants. The Federal Reserve may also allow merchants to choose from at least two “independent” debit networks for routing transactions. That move would further cut into card company revenues.

Credit Unions – At least bigger banks can absorb curbs in debit fees. That’s not the case for credit unions – they actually spend a lot of cash administering debit card programs. Consumers may not think about it, but credit unions have to pay for add-ons like fraud protection, data-breach technologies, and card administration support costs. Not having the extra cash from debit card fees could cause credit unions to fall further behind banks from a competitive standpoint.

Chalk this one up as a win for consumers and small businesses–but a big loss for banks and credit card companies. The victor could be a pyrrhic one, though. Big financial institutions have a way of creating new ways to make money. Don’t be surprised to see new fees from banks and card companies down the road.

After all, there’s no getting between a big financial firm and its money.