The battle over debit card fees is one of the biggest consumer fights of the year, and we still don't know if it will be good or bad for consumers.
All we know is that the political score stands at retailers 2, banks 0.
Retailers used their clout last year to get a limit on debit card interchange fees included in the Dodd-Frank banking law. Bankers tried to use their clout to get the limit delayed, but fell short in a Senate vote this week.
Both the shopkeepers and the moneylenders claim to be on the consumer's side. Retailers say a ceiling on debit card fees could lead to lower prices. Bankers say it will just pad the stores' profits.
Bankers also say they'll need to find other sources of revenue to replace an estimated $14 billion in lost swipe fees. Retailers currently pay an average of 44 cents when you use your debit card at the cash register; the Federal Reserve has proposed a maximum fee of 12 cents.
The Fed is supposed to put a final rule in place by July 21, but banks aren't waiting that long to change their debit card offerings. PNC Bank and JPMorgan Chase have already announced that they'll eliminate debit card rewards programs, and US Bank is making its rewards less generous. Others are adding various checking account fees, or making it harder to qualify for free checking.
"Whatever the banks lose, they usually come up with a different rate or fee to pass it on to consumers," says Bill Hardekopf, chief executive of LowCards.com.
New fees are likely to multiply once the rules are in place. Odysseas Papadimitriou, chief executive of CardHub.com, says we'll see a big change in the types of plastic we carry.
If you loved your debit card rewards program, the bank may encourage you to switch to a credit card rewards program instead. And young consumers, who do most of their banking online and love the convenience of a debit card, may be pushed to use a prepaid card that functions like a reloadable gift card. Neither credit cards nor prepaid cards are subject to the fee limit.
"The net effect will be a restructuring of the market, with no increased competition and no savings for anyone involved," Papadimitriou says.
The new fee limit applies only to banks with assets of more than $10 billion, and there's disagreement about how it would affect smaller banks. Advocates of the fee limits say small banks will be untouched, but bankers say they won't have enough clout to continue collecting higher fees.
Thomas Holloway, president of the Bank of Edwardsville, explained that concern in a February letter to the Fed. "Our payment card network vendor has advised it will not support a two-tiered interchange pricing network," Holloway wrote. "Accordingly, our 2011 budget revenue projections have been decreased by 1 million dollars ..."
He said debit card transactions cost his bank 17 cents apiece, so if it can collect only 12 cents from retailers, "our debit card program will either end or will radically change."
Papadimitriou says he knows of no technical reason why big banks and small banks couldn't charge disparate fees. He thinks small banks actually might steal some customers from the giant banks that are doing away with free checking.
Most people, however, stay with their bank out of inertia. If you're not willing to shop around, you'd better read carefully any fee notices you get from your bank. The debit card you know and love may not be the same after July 21.
