What the Debit Card Interchange Rules Mean For Consumers

The Federal Reserve Board announced final rules that will limit debit card swipe fees, as mandated by the "Durbin Amendment" under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It backed away from a proposal to cap debit interchange fees at 12 cents per transaction, and instead the Board voted on a final proposal that includes a cap of 21 cents per transaction, plus 5 basis points on the amount of the transaction for fraud costs, plus 1 cent for fraud prevention costs (the penny could change). Financial institutions with $10 billion or less in assets, governmental benefit cards, and certain prepaid cards are exempt. The cap is better than many banks had hoped, though higher than retailers may have expected given the previous proposal.At stake is an estimated $14-19 billion a year in revenue issuers collect from merchants when consumers use their debit cards to make purchases. Merchants currently pay an average of about 44-47 cents per transaction, which is divvied up among the merchant's financial institution and the bank or credit union that issued the card. (Visa and MasterCard also get paid, though not directly.) Under the new rules finalized today, issuer revenues will be cut, but not as dramatically as initially expected.

"It backed away from a proposal to cap debit interchange fees at 12 cents per transaction, and instead the Board voted on a final proposal that includes a cap of 21 cents per transaction, plus 5 basis points on the amount of the transaction for fraud costs, plus 1 cent for fraud prevention costs (the penny could change). "

More consumers now have debit cards than credit cards, and consumers use debit cards more often than cash, credit cards, or checks individually, according to the the 2008 Survey of Consumer Payment Choice. If you're among those consumers who rely on debit cards, is that about to change?

If you have listened to the arguments on both sides of the issue (or all four sides, if you include small issuers, large issuers, retailers and consumers) you'd think the sky is falling. But this may just be a bit like an industry-created Y2K, with fear-mongering and uncertainty cultivated from both sides. Big money has been at stake.

Big Debt Card Changes Coming

With today's announcement, we can confidently say that debit cards are not going away. Even if the interchange limit were stricter, financial institutions have invested far too much time and money persuading consumers to move away from cash and checks to abandon them now. Many consumers don't have, or don't want to use, credit cards. Do most merchants really want to risk losing sales by discouraging these "plastic checks" and the additional sales they bring?

Restrictions on interchange fees will be effective October 1, 2011. The rules that related to the networks over which transactions are processed and competition among networks take effect October 1, 2011 and April 1, 2012.

The impact of this rule will play out over the next couple of years, and at least one Federal Reserve Board member said there is no evidence of what the impact will be on consumers. Here are some scenarios, however, and what I think is likely to happen:

Lower prices at the cash register? Don't hold your breath. Retailers insist they are going to be able to bring prices down as debit swipe fees go down. The Federal Reserve Board said, though, that looking at other countries, the evidence is weak that lower interchange leads to lower prices for shoppers. So don't hold off on making major purchases until October 1st, hoping to get a better bargain.

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