It seems no matter which news publication I visit, a journalist is reporting on the Durbin Amendment and how its new rule to limit merchant interchange fees on debit cards is affecting either the institution, organization or individual. To paint a full picture, I thought it was time to outline how it affects each party involved.
In case the Durbin Amendment is new to you, let me quickly outline what the new law regulates. Essentially, it takes the fee banks charge merchants to process debit card payments from 20 cents per swipe and cap it at 12 cents. The goal is to decrease overhead costs for merchants, which would hopefully prompt them to lower product costs benefiting the customer.
The proposed rules are slated to be sworn in by April, 2011.
It is also important to note that the rule only affects banks with assets of $10 billion or more, but as I will point out later, this is not really the case.
Banks over $10 Billion in Assets
With an estimated $12 billion a year in revenue at stake, banks like Bank of America® and Chase will no longer be able to charge their current high interchange fees to merchants whose millions of customers use the banks debit cards everyday.
If this rule goes into effect, banks will look for new ways to cover the loss in revenue and in most cases the consumer is the one who will be taking the blunt of the hit. To make up the difference, banks have started to adjust their checking account offerings, adding new fees and upping the requirements to avoid existing fees. A good example is one that Simon, one of our journalists pointed out, which highlights that the debit card fee cap has lead to big banks removing debit card transactions as a requirement to avoid monthly fees.
Other changes that have become more common is the requirement to register for online banking and switch to e-statments instead of paper statements.
Though we rarely cover Credit Unions at MyBankTracker.com (though we plan to change this….) I figured it would be a mistake not to talk about these institutions. Though most Credit Unions have less then $10 billion in assets and therefore exempt from this fee cap, it seems they may still lose out. An article on Forbes.com, points to the fact that most merchants work with networks instead of individual banks. Unlike Visa or Mastercard, who have the capabilities to manage different fees depending on the size of the institutions, these low cost payment networks group all the institutions together at one fee, pretty much wiping out any advantage the Federal Reserve attempted to give Credit Unions.
For Credit Unions this is a tough move as more than 75% of them still offer free checking with no strings attached. As profits are cut, they will either have to layoff staff, or find new ways to stay in business. In an attempt to avoid raising or introducing new fees to their checking accounts, Credit Unions have taken action to cover costs lost by increasing other fees such as non-ATM usage; imposing higher minimum balances to open the account; and applying a larger penalty for over drafting.
At the end of the day, it was the protection of merchants that really led to the creation of the Durbin Amendment. Now that it looks like it could become a reality, its important to understand why they have been all about this change.
Jinger Duryea, President of CN Brown, owner of Big Apple convenience stores in Maine shared his story, to paint a better picture of how they are currently effected.
“Credit cards are the lifeline of my business as customers use plastic for everything from; a cup of coffee, to a pack of gum, to a tank of gasoline. Credit cards and debit cards are easy to use, but what customers don’t know is that every time they use a credit card, I pay a fee. For example, a customer purchases a local newspaper (75 cent retail) my profit is 9 cents. If the customer is using a debit card I would pay 25 cent for the transaction fee plus .08% interchange fee. If the customer puts down a Visa credit card the transaction fee would be 19 cents plus 1.68% interchange fee. Regardless of the payment option I lose money on the sale.” (source: SeekingAlpha.com)
Reading Duryea’s story, it sounds like this change is valid, but what about the mega-stores like Wal-Mart, Target and Costco. These stores have been undercutting the smaller mom and pop shops on items we purchase since their beginning. It only makes sense that they will be able to negotiate even lower fees with the 12 cent cap—giving them an even bigger opportunity to drop product costs and draw more consumers.
You the Consumer / Customer / Member
When the Feds recommended this new cap, the hope was if merchants are charged less from banks that they would lower the cost of the items consumers purchase. While it makes sense, I have a hard time believing that these for-profit merchants will skip out on an opportunity to make more money – keeping the cost of goods the same. Let’s not forget, that they’re a business at the end of the day.
To recap, this new rule seems to affect the consumer the most. Consumers continue to be charged the same price on the goods they buy every week. They loose some of the benefits that the banks offer, such as rewards, high interest rates and no fees, instead creating a need to change your banking habits to avoid monthly fees.
Prepaid Cards #WINNING
As the dominos align themselves to fall, it is the Prepaid market that seems to be in the perfect position to benefit from this change. A study preformed by Bank 2.0 author Brett King, found that the new checking fees caused by the Durbin Amendment could cause up to 5% of banked consumers to leave the traditional banking systems.
This swift change, along with findings that highlight that U.S. consumers could save more than $141.65 on annual fees going the prepaid route is why the prepaid market is on pace to reach $200 million in 2011.
What do you think? Are consumers getting the worst of this change or will additional rules be put in place to keep banks from adding additional fees?