A new federal law curbing fees on debit-card transactions could wipe out $9 billion in revenue annually for issuers.
The Durbin Amendment, which is part of the financial-overhaul bill enacted in July is one part of the reform. It calls for the Federal Reserve to determine that rates on debit-card transaction or interchange fees are “reasonable and proportional,” and that they cover the ” actual incremental cost” of the transaction. The Fed still has several months to set new terms. “The Durbin Amendment could significantly impact consumers by increasing the cost of their everyday debit card transactions, limiting their payment choices and impacting industry innovation,”Banks are scrambling to gain back some of the lost revenue from this and prior regulatory changes. Among the new tactics being considered:
- Emphasizing prepaid cards, which are exempt from the new rules.
- Adding new fees to existing products.
- Having minimum balances for checking accounts.
- Watering down debit card reward programs.
CardHub.com, estimates that if the Fed cuts interchange fees by half — considered a possible scenario by the industry — debit-card issuers will annually lose $9.1 billion, or $18.35 per debit card, in revenue.U.S. general purpose debit card purchases totaled $1.45 trillion in 2009, up 7.5% from 2008, according to the Nilson Report, which tracks the payment industry. Spending on U.S. Visa- and MasterCard-branded prepaid cards totaled $ 49 billion in 2009, accounting for 3.39% of all debit card purchase volume that year. Bank of America, Wells Fargo &Co. (WFC) and J.P. Morgan Chase & Co. (JPM) are the top U.S. issuers of debit cards. The three accounted for 38% of all debit card purchases in 2009, according to Nilson.
In August, Bank of America introduced its most basic checking account with a monthly fee of $8.95.
- Customers may avoid this fee if they sign up for paperless statements and use automated teller machines or ATMs, and not bank tellers, for routine transactions such as deposits and withdrawals.
- Last month, the firm took a $10.4 billion charge in its third quarter because of “limits to be placed on debit interchange fees … which will reduce future revenues.”
- It is also testing different checking accounts, allowing customers to choose between a monthly maintenance fee or avoid this fee by using a Bank of America-issued debit or credit card or keeping higher account balances or a mortgage with the company.
- Customers can avoid this fee if they use their account at least five times in a month, including to pay bills and withdraw cash from an ATM. Monthly fees for Citigold — its fully loaded checking account with perks, including free paper checks and no annual fee on certain Citi credit and debit rewards cards — will be $30.
- Customers may avoid this fee if they satisfy certain conditions, such as maintaining a minimum balance of $50,000 across their checking, savings and money market accounts.
Unintended consequences of financial reform always seem to raise the cost of doing business to the consumer, and the banks and credit unions still need to make their profits.
I wonder if the Free Toaster will be offered again for new accounts?
Let me know if you think these financial reforms are a good thing?