Why Swipe-Fee Reform Killed Free Checking, Didn’t Lower Consumer Prices

Simon Zhen

By , Staff Writer
Posted on Sat Oct 20, 2012, Last Updated on Sat Oct 20, 2012

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One year after swipe-fee reform, opponents and supporters of new financial regulations maintain their stance on the effects of the reform. Opponents say retailers did not keep their promises of lower consumer prices, while consumers also face increased fees on their checking accounts. Supporters acknowledge that the retail industry is reaping the savings, but these savings are being passed on to customers in ways other than price reductions.

In October 2011, new financial regulations capped debit-card processing fees to 22 cents per transaction, down from an industry average of 44 cents per transaction, for big banks (with $10 billion in assets or more). The fees are paid by merchants to banks whenever consumers use a debit card to pay for purchases.

But banks weren’t crazy about losing that revenue. So most big banks responded by adding fees on checking accounts, which issue debit cards. Millions of consumers had their free checking accounts converted to accounts that had flat fees or fees that could be waived when certain criteria is met.

Currently, only one of the 10 largest U.S. retail banks offers free checking (with no strings attached) — PNC Bank. In September 2010, eight of these 10 banks offered free checking accounts. When swipe-fee reform was proposed in December 2010, most of these banks started to add fees to their checking accounts.

Give with one hand, take with the other

In a perfect world, the loss of free checking would have been offset by savings provided by retailers, who reaped significant benefits from swipe-fee reform. According to the National Retail Federation, swipe-fee reform led to $18 million in daily savings (nearly $6.6 billion annually) for retailers in the past year.

Home Depot said it slashed prices on more than 3,000 products of its 40,000-item store inventory. “We have absolutely lowered prices … [but] what I can’t do is draw that direct correlation to Durbin,” Home Depot’s treasurer and vice president of credit Dwaine Kimmet said in a June interview with American Banker.

Ikea offers savings vouchers to customers who use a debit card to pay for purchases. Customers receive 1 percent of their purchase in the form of a voucher for a future purchase. The furniture retailer has offered this program since 2002, many years before swipe-fee reform.

The Electronic Payments Coalition, a group that represents banks, credit unions and payment networks, conducted a study on the impact of the financial regulations on consumer prices and found no significant savings from price reductions.

The EPC purchased the same basket of goods at Home Depot, Walgreens, Walmart and 7-Eleven before and after the new laws took effect. From September 2011 to September 2012, the study actually found that consumers paid an average 1.5 percent more for the same products.

Some card processors have not yet passed fee reductions to retailers, the NRF said. Retailers may use the savings to improve customer service. Some gas stations are now offering the same cash-discount to customers who pay with debit cards.

According to a report by Moody’s Investors Service, it’ll be difficult to find price drops because retailers are likely to use the savings to suppress price increases that would have otherwise occurred without swipe-fee reform.

The NRF will continue to push for further reduction in debit interchange fees — the original reform proposal mentioned a 12-cent cap on debit swipe fees. Will additional swipe-fee reform allow consumers to experience more tangible price savings to make up for the higher costs of checking accounts?

 

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  • Roy

    This is what the liberal mind can’t and will never be able to grasp: Government almost never fixes anything, instead it almost always makes things worse/more complicated.