Do Lower Debit Card Fees Help or Hurt Consumers?

Dec. 18, 2010 — -- The Federal Reserve on Thursday proposed a drastic decrease in the fees retailers pay debit card issuers when a consumer uses a debit card. While retailers praise the proposal, and claim they will pass on their savings to customers, banks and debit card processors say consumers will end up paying higher costs somewhere else down the line.

The Fed proposed a cap on debit card swipe -- or "interchange," fees -- of 7 to 12 cents for each transaction, compared to the existing average fee in 2009 of 44 cents for each transaction.

Financial lobbying groups have decried the proposal, which was authorized by the Financial Regulatory Reform Act, known as the Dodd-Frank Act, earlier this year. The American Bankers Association, National Association of Federal Credit Unions and Credit Unions National Association say the proposed 85 percent drop in interchange fees, will negatively impact not just large card processors like Visa and MasterCard, but consumers as well.

The cap is aimed at financial institutions with assets greater than $10 billion, but other financial organizations, like nonprofit credit unions, say they could be adversely impacted by card processors like Visa and MasterCard.

Mike Losneck, CEO of Eaton Family Credit Union, in Euclid, Ohio, said if the largest companies have to lower their fees, then other banks will have to follow suit to stay competitive. He also said revenue from interchange fees significantly help offset the cost of monitoring fraud on the debit cards.

"We're a nonprofit operation but we still need to make money and have reserves to invest in products and services to offer our members," said Losneck. He added that because Eaton is owned by its 13,000 members and not outside shareholders, it can offer more competitive savings and loan rates.

Rob Windsor, president of First Financial Credit Union of Maryland, said he would have no choice but to raise fees for other services if there is a loss in revenue from the interchange fees. First Financial is owned by its 56,000 members, mostly educators from public and private schools in Baltimore and Carroll County.

If Debit Fees Go Down, Other Fees Will Go Up

Winsdor said debit card transactions are a large and growing business and a cap on interchange fees would negatively affect his business. His credit union's current average debit card transaction yields 51 cents in revenue and 78 percent of the transaction volumes are with debit cards, as opposed to credit cards. A 12 cent cap would cut interchange revenues by 77 percent and First Financial would lose $1.3 million as a result, according to Windsor.

"I can't absorb that so we're going to have to pass that to our members," Windsor said.

Windsor estimated that to recoup the losses from the interchange fees, he would have to charge his Visa debit card holders $4 each month.

"It's going to change the whole environment because consumers are used to getting all these services for free, including free checking, debit, credit. But none of these things are free. We need revenue to pay for them," Windsor said.

Other critics of the proposal question whether a mandatory price cap will fulfill its purpose, which is to protect consumers.

Earlier this month, a bipartisan group of senators signed a letter to Fed chairman Ben Bernanke expressing their concern over the long term effects of capping interchange fees.

The eight Republicans and five Democrats, which included Senate Banking Committee members Richard Shelby (R-Ala.) and Mark Warner (D-Va.), wrote that "in the long term, price fixing creates more problems than it solves and is antithetical to our capitalist system and the notion of free enterprise. More importantly, price fixing harms consumers."

Merchant groups like the National Association of Convenience Stores and the National Retail Federation (NRF) called the Fed's proposal a "positive step" toward their goal of removing all interchange fees from debit cards, thereby equating them with paper personal checks.

Mallory Duncan, the NRF's senior vice president and general counsel, said lowering fees for retailers will most likely lead to lower prices for consumers. According to the NRF, $20 billion in debit card swipe fees are charged annually by the banking industry.

Banks, Retailers Debate Fee Proposal

Mallory said after the Fed announced its proposal, some NRF members, including a large national pharmacy, other retailers and restaurants began strategizing how to use a possible interchange fee cap to lower prices and attract customers.

"Everyone is looking for ways to save money. If we're looking for ways to save our customers money, it grows our market share," said Mallory. "We're happy because we sell more things at $99 than $100, because people are happier to buy it."

Dean Sheaffer, senior vice president of financial services at Boscov's Department Stores, said if the proposal is approved, retailers will respond in a number of ways, including price reductions, adding jobs, or growing their business by adding locations.

"I think it's going to depend on the customer value proposition that individual retailers will offer," said Sheaffer.

The Fed is accepting comments about the proposal until February 22, with a vote to approve the final proposal by April 21. Scheaffer said Boscov's, a member of the NRF and the country's largest independent family-owned department store, has not made a decision whether they will make comments to the Federal Reserve.

Sheaffer said it makes sense to eliminate interchange fees altogether on debit cards, a feature personal checks have had, because technology has removed most of the transaction costs associated with them. And he said that, in the end, competition and the consumer will win.

"Up until now, prices were set by banks and retailers have not been able to negotiate on interchange fees. Today it's a very anticompetitive landscape," said Sheaffer. "This will allow retailers to negotiate so they can choose a lower priced product. We're looking for the best value for us so we can offer the best value to our customers."