Changes in Interchange Fees Affect Consumers, Retailers, and Banks

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Retail lobbyists fought hard to win a limit on interchange fees - the charge retailers pay to banks to process debit card transactions. Their victory may backfire: Banks are now threatening to limit debit card transactions to $50-$100.

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Last December, the Federal Reserve proposed to cap debit card swipe fees at 12 cents per transaction, a surprisingly sharp decrease from the current fee that averages between 1 and 2 percent of a transaction. Merchants fought hard for this limit on interchange fees, but in the end, it could backfire on retailers and consumers. Even the Federal Reserve governors are now questioning the impact this bill will make on consumers.

On Wednesday, a subcommittee of the House Committee on Financial Services will explore the impact of the Dodd-Frank legislation, including the decrease in interchange fees. The Federal Reserve Board will issue final rules for the interchange fee standards in April, and the new rules should go into effect in July.

Banks aren’t accepting this huge cut in revenue without a fight and are trying to delay the deadline. According to ABC News, some big banks – including Bank of America, Citigroup, and JP Morgan Chase – might limit each debit card purchase to $50 or $100 if Congress accepts the new rules for swipe fees. This could be a scare tactic by banks, but banks have proved again and again that regulations that cost them will eventually be passed on to consumers.

Debit card limits might force consumers to use checks, cash, or credit cards for larger purchases. In the very near future, $100 might only cover a tank of gas for some consumers.

“Limiting debit card usage would be a big blow for consumers,” says Bill Hardekopf, CEO of and author of The Credit Card Guidebook. “Turning to credit card usage for large purchases could quickly push cardholders to the credit limit. It could significantly increase the balance they carry from month to month, costing them dearly in interest penalties and possibly even hurting their credit score.”

If consumers turn to cash, this could lower sales volume for retailers since consumers spend less when they pay with cash. Even checks, which require writing out the full amount, would provide a small warning about overspending.

“The pain is real when you have to hand over hard-earned dollars,” says Hardekopf. “When you pay with cash, you are more likely to only buy what you need. Returning to cash would hurt the retailers but would actually be good for the household budget.”

A cap on debit cards could also minimize the growth and usage of smartphones for electronic payments. The debit limit cap is part of the Dodd-Frank financial reform law. Banks charge as much as 2 percent for interchange fees. The National Retail Federation estimates that debit card fees total about $20 billion annually. Bank of America, the biggest issuer of debit cards, said last year that the fee limits could cost the bank between $1.8 billion to $2.3 billion each year.

When banks lose revenue in one area, it is consumers who usually pay the price. This can come in the form of new fees or a cut in benefits or rewards. Many banks are already adding new fees to bank accounts in response to other regulations.

There is still time for a surprise ending. According to the Associated Press, the Federal Reserve told Congress last Thursday that it may reconsider its proposal to limit the fee that banks charge merchants for debit card. Fed Board member Sarah Bloom Raskin told the House Committee on Financial Services that the Fed has received thousands of comments on the proposal and expects many more. She also said the Fed was uncertain about how much of the savings would be passed to consumers and how much banks would boost their fees.

Stacy Johnson

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