Debit-fee plan irks banks, may not be win for consumers

Swipe, ka-ching. Swipe, ka-ching.

That’s not just the sound the register makes when you shop. Each time you swipe the plastic, merchants pay a fee to banks to complete that transaction. Now the Federal Reserve is poised to drastically cut how much banks can charge merchants for debit transactions.

And that change, bankers and some consumer advocates say, could be costly to you.

Retailers disagree. They say the competitive business environment will force merchants to drop their prices—meaning consumers win.

Consumers don’t see these so-called interchange or swipe fees; they’re built into the prices merchants charge for most all goods and services, whether you pay with plastic or not.

The fees currently charged to merchants for debit transactions are about 1.5 percent of the purchase amount—or around 44 cents on average.

The proposed rule would be a hard cap of 7 cents to 12 cents on debit swipe fees charged by the big banks.

That could be $13 billion in lost revenue to the nation’s banks, according to CardHub.com. Experts say banks will be forced to make up lost revenue through higher fees on other services or consumers might be charged transaction fees directly from the bank. Banks could also eliminate debit cards on certain low balance bank accounts.

“We either reduce the benefits attached to the [debit] card or charge for services that were previously free,” said Joe Brannen, president and CEO of the Georgia Bankers Association.

Brent Harris, 40, of Cumming, said he rarely carries cash and uses a debit card for most purchases. His bank even moves a small amount of money from checking to savings each time he swipes his debit card -- a benefit that might disappear, bankers say.

Harris said that if fees go up in other ways, or benefits are cut, he’d consider other forms of payment.

“It’ll be interesting to see who in the end ends up paying,” he said. “One way or another, it’ll end up hitting the consumer.”

According to the National Retail Federation, swipe fees totaled $48 billion in 2008, of which $20 billion were from debit card purchases.

NRF Senior Vice President and General Counsel Mallory Duncan said in a news release the regulations "are a significant step toward reining in credit card industry fees that have driven up prices for consumers for far too long."

Consumers use debit for about 35 percent of all purchases, according to the Financial Services Roundtable, and its popularity grew 15 percent from 2006 to 2009.

Debit was used by Americans for 38 million purchases, with a dollar value of $1.5 trillion, during that time.

The Fed rule would apply to debit cards from issuers with more than $10 billion in assets. Smaller banks and credit unions could charge merchants more, but advocates for smaller institutions say merchants could choose to not accept cards from smaller lenders if they charge more.

“Financial institutions will have to find a way to be compensated for what they do,” said Mike Mercer, president and CEO of Georgia Credit Union Affiliates.

The cap on interchange fees stems from an amendment to the Dodd-Frank financial regulatory reform. It is the latest move to curb fees charged by financial institutions and is intended to be pro-consumer.

The Fed is scheduled to issue final rules by April 21, with implementation in June.

Last week, U.S. Rep. Barney Frank, D-Mass., whose name is on the bill, said the proposed cap by the Fed is too low and doesn’t cover the high costs banks and payments processor incur to offer secure systems.

Debit swipe fees amounted to $250 million in 2009 for Atlanta-based SunTrust Banks, one of the largest banks in the U.S. A SunTrust spokesman declined to comment on the proposed regulation.

Atlanta is a major hub for banks, payments companies and retailers and restaurants that pay these fees. The ramifications of the potential debit swipe fee changes, and other parts of the proposed regulations, could be huge.

Certain reloadable prepaid cards aren’t part of the proposed regulation, for instance.

Tim Sweeney, of FinTech Partners, an Atlanta financial technology research and development firm, said banks could push more consumers into prepaid cards, which could be a boon for that industry.

The proposal also contains provisions requiring signature debit and PIN-based debit transactions be permitted to be carried out over more than one card network, such as STAR or NYCE. That could hurt issuers like Visa and Mastercard, experts said, and ratchet up competition among other players in the card industry.

Atlanta-based First Data, which operates the STAR processing network, and operators like it could stand to gain marketshare. Competition should be fierce.

“One of the big challenges of [the] amendment is that there’s a lot we don’t know yet,” said Patricia Hewitt, director, debit advisory service Mercator Advisory Group.

Columbus-based TSYS, which provides outsourced payment systems to banks, card networks and merchants, said in a statement it is “concerned about the increasing amount of change and regulation facing the payments industry,” adding “it's not a good idea" to put government in charge of price controls on private industry.

Another provision could require prepaid card companies to offer PIN access to certain non-reloadable cards. That could allow prepaid card users access to ATMs, but would be a compliance nightmare for the prepaid industry requiring the collection and verification of cardholder information, said Brad Fauss, general counsel for Atlanta-based Prepaid Solutions.

According to the Fed’s card issuer survey, about 75 percent of prepaid cards are currently enabled for use only on signature networks.

Certain prepaid cards aren’t designed for cash access. But such access runs up the risk for money laundering and other types of fraud.