Banks argue proposed cap on debit card fees would lead to higher costs
NEW YORK — A proposed cap on the fees that banks charge for debit card transactions would substantially reduce the cost for businesses. But it’s started a death watch for debit card rewards and renewed predictions that free checking is done for.
At issue is who will ultimately benefit from the savings? The Federal Reserve’s proposal to cap these fees, officially known as interchange fees, at 12 cents per transaction would enable retailers to pass on annual savings of $10 billion to $13 billion to consumers.
But banks and card networks maintain that retailers will pocket the savings. This would leave consumers to bear the brunt of the new law through higher costs for banking and reduced rewards programs.
In releasing its proposal Thursday, Fed staff said they found the cost to banks for processing is between 7 cents and 12 cents per transaction. Yet every time a customer swipes a debit card, the average fee is 44 cents. “The banks have a very sweet deal here,’’ said Senator Dick Durbin, who sponsored the provision in the financial regulatory overhaul that ordered the Fed to set rules on these fees. The Illinois Democrat acknowledged the legislation does not require merchants to share any cost reductions with customers, but said they’re likely to benefit at the checkout.
If implemented, slashing interchange rates would be another revenue hit for banks. They’re already dealing with increased costs linked to other regulations in the financial overhaul, plus restrictions on overdraft fees and credit cards.
Shawn Miles, group head of public policy for MasterCard Inc., said banks will have to compensate for the loss of revenue by adjusting the fees they charge consumers. “That’s the only way they could deal with something that was this dramatic,’’ he said. Wall Street and the banking industry were expecting the proposed cut would call for fee cuts of no more than 60 percent. The proposal is close to a 73 percent cut.
Supporters of the lower fees say the loss of debit rewards won’t be that painful. The programs are not that widespread. Only about 16 percent of checking accounts have programs, and an estimated 30 to 50 percent of rewards are left unused.
“We were never getting debit card usage for free, it was just a pretense,’’ said David Balto, a senior fellow at the Center for American Progress, a left-leaning think tank. The price of interchange was simply hidden from customers because they didn’t see it added to the costs of what they purchased, he said.
Customers of smaller banks and credit unions may also feel a negative impact from the regulation even though smaller institutions are left out of the law and won’t face a cap on their fees.
“The legislation says we are carved out, but there’s no real enforcement provisions,’’ said Bill Cheney, chief executive of the Credit Union National Association.
Eileen AJ Connelly is a personal finance writer for the Associated Press.