The big banks are threatening to hit you with fees for using your debit card. JPMorgan Chase fired the first shot across the bow last week, by canceling its debit-card rewards program.
Why is this happening? Because the banks lost an epic battle with retailers, which will force them to slash the fees they collect on all debit-card transactions. As we speak, they're trying to get Congress to let the high fees stand, and you're collateral damage in the fight. If they can't collect more from the merchants, the banks are warning, they'll collect more from you.
Could they get away with it? Maybe, in the short run. In the long run, however, however, consumers will find no-fee options from other institutions. Debit cards are more popular than cash or credit. The last thing banks should want is for you to put your cards away.
The debit-card story starts with the interchange networks, which carry the transactions between store and bank and are dominated by MasterCard and Visa. They charge merchants high, monopolistic fees -- around 1 to 2 percent of each debit purchase, for an average of about 44 cents. That fee -- called a "swipe fee" -- is paid to the card-issuing banks and totaled more than $16 billion in 2009. Consumers shoulder the expense, in the form of higher retail costs for goods and services.
The Dodd-Frank Wall Street reform act recognized that competition among the interchange networks didn't really exist. An amendment sponsored by Sen. Richard Durbin (D-IL) told the Federal Reserve to set a reasonable cap on swipe fees, which the Fed decided was 12 cents tops. The banks screamed to Congress, warning that -- if the rule went through -- they'll take the rest of their $16 billion out of the hides of their customers. The caps will be finalized next month and take effect in July.
Bank supporters in both houses of Congress have introduced legislation to delay the caps, so they can be reconsidered. But "the goal of the industry is not delay, it's repeal," says Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group. Banks want to keep their cushy deal.
It's not at all clear, however, that you will actually be stung in the wallet, if lower caps go through. Here are six things to watch for:
1. Will Congress delay the swipe-fee caps? The vote in the Senate is coming up, with Durbin fighting to keep it alive. Consumer groups are also mobilizing in its defense. If banks are stopped from overcharging merchants, at least some of those savings should be passed along to you.
In one respect, however, consumerists back the banks. They think the Fed's proposed caps are too low. "They don't cover the bank's legitimate costs," says Travis Plunkett, legislative director for the Consumer Federation of America. That makes it more likely that fees for banking services will indeed rise, especially for low- and moderate-income families who maintain small accounts. But even if swipe fees rise by another few cents, merchants will pay less than they do now. That should be good for their customers in the long run.
2. Will retailers actually pass some of these savings on, in lower prices (or slower price increases)? You're right to be skeptical. In highly competitive businesses, such as grocery stores, consumers should benefit. In industries with pricing power, such as high-end clothing brands, probably not -- at least, not right away. Ultimately, prices are driven by costs. Debit and credit card fees are a merchant's second-higher operating expense, after labor costs, says Doug Kantor of Steptoe & Johnson, who lobbies for the retailers.
3. Will the banks follow through on their threat to add debit card fees? Some experts think so, others don't. Greg McBride, senior financial analyst at Bankrate.com, expects to see monthly service fees, or perhaps an increase in the number of times you have to use your card to qualify for a no-fee checking account. Gerri Detweiler, personal finance expert for Credit.com, thinks some financial institutions will levy transaction fees, such as 25 cents on every purchase.
On the other hand, banks will still make money from swipe fees, Mierzwinski says -- assuming (as he does) that the Fed will agree to a higher cap. "They're not going to shoot the goose" by doing something that makes people use their cards less, he says. "The banks are just trying the scare Congress into doing something they want."
If your big bank does impose fees, you don't have to put up with it. Other institutions will stay fee-free, including many credit unions and community banks.
4. Will the loss of swipe-fee income lead smaller financial institutions to levy fees, too? The credit unions and community banks are screaming right along with the bigs. But the law exempts institutions with assets under $10 billion, meaning that they can still collect the higher swipe fee. A well-managed credit union shouldn't have to mimic the big banks' threat to hurt their customers.
5. Will you lose debit-card rewards programs? Maybe. It remains to be seen whether other banks follow Chase's lead. If they do, the loss isn't large. In general, debit-card programs offer only half the points that you get from using credit card rewards. In any event, McBride doubts that they'll go away entirely. Instead, you might see more merchant-financed awards, such as points for shopping at particular stores, and fewer general awards such as cash back or airline miles. (Here's Bankrate's latest roundup of the top debit reward programs.)
Banks generally use rewards to push you toward making debit purchases based only on your signature rather than entering a personal PIN. That's because they earn more from signature accounts. But PIN transactions are better for you because they're more secure. Mierzwinski predicts that, thanks to the competition the law encourages, you'll have access to new kinds of PIN networks, and new debit products. Merchants could offer discounts for using your debit card, as opposed to your credit card (where the swipe fee is still high). Kantor says that discounts for cash are now more likely, too.
6. No matter what happens, the safety rules remain the same. Debit cards carry more risk than using a credit card. If a thief makes a debit purchase, the money comes directly out of your account. You can generally get it back, but in the meantime you might not have enough to pay your bills. Debit users should monitor their bank accounts all the time, online, Detweiler says. Don't wait for the monthly statement. Be in a position to raise an alarm the moment a fishy transaction comes in.
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