5 Effects of a 12-cent Cap on Debit Card Fees

by JT McGee

The Federal Reserve is examining a new rule that would cap point of sale debit card fees to 12 cents per swipe. While the reduced fees sound great in theory, there are plenty of unintended consequences that need to be uncovered.

12 cent cap on debit card fees1. Limited transaction amounts – Because of the current percentage-based fee structure, a 12 cent cap on debit card fees could mean that banks allow debit card purchases only on purchases of $50 or less, the maximum customer liability for fraud. Currently, percentage-based fees mean it is just as profitable to protect customers from $1000 of fraud as it is $2 of fraud. Not so much after the switch.

2. New fees on checking accounts – In order to generate the same amount of revenue, banks are pondering new monthly service fees just for having a checking account open. One of the worst possible outcomes here is that some bank customers will close their checking accounts altogether, joining the millions of “unbanked.”

3. Transfer of wealth from poor to rich – The overwhelming majority of the unbanked population are those who have the lowest income. If banks make the switch to flat-rate, monthly fee checking accounts it will be the poor who carry proportionally most of the burden of new fee structures. Today, those who spend the most are the ones who pay the most in passed-on fees. In the future, fee-based checking would mean those with the least amount of money spend the most on fees.

4. Credit comes back – The 12 cent cap would not apply to credit cards, giving banks an incentive to push credit cards over debit cards.

5. Bank revenue plummets – Wall Street has priced in a drop in fee revenue of as much as 60%. Of those hardest hit will be Mastercard and Visa, which derive almost all of their revenue from credit and debit card processing fees.

5.5 New Fees on ATMs – In response to the new law, JP Morgan Chase will be testing out fees of $4 or $5 on various ATMs around the country. The company sees ATMs as one of the few unrestricted revenue sources that allow Chase to derive revenue to subsidize customer account services with revenue generated from non-customer ATM transactions.

{ 8 comments… read them below or add one }

Ravi Gupta March 14, 2011 at 08:55

It’s very interesting to see the effects that regulation will put on the industry. A couple months ago I recieved an offer from Chase for $100 cash back for opening a checking account with them and now they are tacking on fees for that same account. Personally I’m interested to see how this will affect me since I do most of my spending on my credit cards. Will $0 annual fees be a thing of the past? Will new fees be introduced to charge customers a % of their purchases for convience?

Thanks for the great article. I had no idea that this was even being considered.

-Ravi G.

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Afford-Anything.com March 14, 2011 at 14:59

Most banks have checking account fees now. Free checking was normal 5 years ago; now you really have to search hard to find it. For those looking for free checking, I recommend credit unions. Because credit unions are member-owned rather than shareholder-owned, they generally have you (the customer’s) best interests at heart. Online banks, which have lower overheads, are also a good option.

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JT McGee March 14, 2011 at 15:21

@Ravi G. – They’re not going to target credit card fees, which I can imagine is because of the gap between card fees and goodies for people with rewards cards. That sounds like a good post topic, actually.

@Afford – As a member of a credit union I didn’t even know free checking is going extinct. At least where I live there are quite a few for-profit banks with free checking accounts, but that is probably due to the fact that operating costs are far lower here than in metro areas. Plus, our real estate market isn’t in the gutter…at least not to the degree as any other. But yeah, I wouldn’t trade my credit union in for anything.

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Mark March 16, 2011 at 02:46

I hate the fees on checking accounts. They are popping up at almost all of the commercial banks now. I think Visa and Mastercard will be okay because they have virtual monopolies.

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Charles @ CreditDonkey March 17, 2011 at 17:33

Mark,

With all the new regulations, new fees on checking accounts are relatively reasonable. Since they essentially stop automatically opting-in people to overdraft protection (which was a billion+ revenue generator), they have to make up the short fall somewhere.

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Bogey March 16, 2011 at 08:51

Banks always get a hard time, especially on this front. But think about all the services that banks have essentially been providing to consumers for free for years and years. The only way that most consumer accounts were profitable was income generated from debit card trasnactions, and now that is being capped.

People don’t expect other businesses to take care of customers that they lose money on, so why expect that from banks?

Another thing to keep in mind when folks start hating on banks – go check out the holdings of every mutual fund that you own. Chances are, the very same people that are griping are also benefitting as shareholders.

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Darwin's Money March 16, 2011 at 20:55

Gotta love the law of unintended consequences. People get annoyed by Tea Party and Libertarians for being whacky, but who else recognizes and tells the government to just stop laying regulation upon regulation when it’s a net loser each time.

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JT McGee March 16, 2011 at 21:14

@Mark – Having a monopoly is only good if you have pricing power. Otherwise you’re just another company in just another market. If the Fed caps fees, it won’t matter if they’re the only ones in the world who process debit transactions as they won’t be able to generate revenue past legal limits.

Granted, I don’t think they’ll go broke, but they’re not going to be getting rich, either.

@Bogey – Because they’re banks! Truthfully, it’s because most people are broke, and because they’re broke it has to be because someone else did it to them. Banks make a perfect populist target. Sad, but true.

@Darwin – After the first comment to this post from Ravi, I’m starting to believe that the unintended is actually intended. Surely there has to be a reason why the fees are going to be capped for debit cards but not credit cards. Hmm….Maybe I’ll do some digging later.

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