What Does the Debit Card Fee Cap Mean for You? An Inside Look.

The average small business will save $1,000 a year thanks to new limits on debit card swipe fees, according to a new estimate by Robert Baldwin, president of Heartland Payment Systems. Small restaurants will save $2,000 a year.

Will those savings be passed on to consumers? Or will it be a wash, as banks hike their fees to make up lost revenue?

“I don’t know, and at this point I don’t think anyone really does,” says Baldwin, whose company processes debit and credit card transactions for small and mid-sized companies.

For people who own small businesses, however, the impact will be real and immediate.

“Most of our clients would say $2,000 is a big deal,” Baldwin says.

The changes are coming due to the Durbin Amendment, which Congress passed last summer to limit debit card swipe fees. Under rules proposed by the Federal Reserve, the fees would be capped at 12 cents per swipe, down from their current average of 44 cents.

Banks spent millions of dollars on a lobbying push to kill or postpone the amendment; big retailers spent millions more to defend it. Banks argued that the big cut in swipe fees would force them to increase all kinds of fees and stop offering free checking; Chase even experimented with $5 ATM fees in Illinois.

Merchants argued the debit card system is a duopoly in which Visa and MasterCard use their dominance to keep fees unnaturally high, forcing stores to hike prices and costing consumers billions of dollars extra every year.

“With the lobbying there were occasional truths being passed around,” Baldwin says. “But obviously a lot of falsehoods, too.”

The merchants won. After failing to get a supermajority in Congress needed to postpone the new rules for a year, banks will watch their debit swipe revenue drop precipitously when the amendment takes effect July 21.

[Related Article: Big Debit Card Changes Coming]

What does all this mean for consumers? That’s hard to say. Since big banks like Citi and Wells Fargo have the most checking accounts, they also issue the most debit cards. As their revenue from debit transactions drops, they will look elsewhere to recoup some of that income, perhaps even charging for debit card access, as Jamie Dimon, CEO of Chase bank, has said on numerous occasions.

But if big banks choose to charge for debit card access, they could be constrained by two factors. First, small banks and credit unions are not subject to the Durbin amendment, so their incomes won’t take much of a hit. If the big banks increase their fees too much, they could watch smaller competitors poach their customer base.

Second, Baldwin points out, debit card transactions are the only means that consumers access their money from which banks make money (as opposed to cash, checks, ATMs and human tellers, all which cost the banks money). Do banks really want to start charging for debit card use?

“It’s hard to imagine [charging for debit card access] will make sense because that will push people to other means of accessing cash that are more expensive for the bank,” Baldwin says.

How about price reductions at the checkout counter? The banking industry argued that retailers are preparing to pocket the billions of dollars they’re about to save on debit fees. Others aren’t so sure.

“On day one? Sure, Walgreens and CVS and all the other big chains are going to have a lot more money,” says Baldwin. “Will that last over six months? Eighteen months? I’m not so sure.”

The clock is ticking. The Fed has less than a month now to publish its final rule before the new law takes effect July 21. What does it really mean for consumers? Now that the dust is beginning to settle, Baldwin says the truthful answer is simple: No one knows for sure.

“It’s all an ecosystem,” Baldwin says. “It is going to, on average, raise some costs for banking services and, on average, reduce some costs for retail. And no one will ever be able to figure it out.”

[Related articles: The Durbin Amendment]

Image: Memphis CVB, via Flickr.com