The Federal Reserve released proposed rules today that would slash debit card interchange fees that banks get when we use debit cards. According to Bloomberg, the "result could be an 80 percent to 90 percent drop in the fees that Visa and MasterCard pass on to banks." The reduction was much more than analysts were predicting which resulted in a dive in Visa and MasterCard stock prices.
For savers the question is how will this affect checking accounts. In particular, it's worrisome for high-yield reward checking accounts since the debit card fees help pay for much of the high yields.
These new rules are due to the financial reform act that was passed by Congress in July. Under the new law, the Federal Reserve is directed to establish standards to ensure interchange fees are "reasonable and proportional." The new rules are to take effect on July 21, 2011.
From page 13 of the draft of the Fed's proposed rules, there's a good summary of the current interchange fees:
The average interchange fee for all debit transactions was 44 cents per transaction, or 1.14 percent of the transaction amount. The average interchange fee for a signature debit transaction was 56 cents, or 1.53 percent of the transaction amount. The average interchange fee for a PIN debit transaction was significantly lower than that of a signature debit transaction, at 23 cents per transaction, or 0.56 percent of the transaction amount.
And on page 58 there's a summary of the proposed interchange fee cap:
The Board proposes a cap of 12 cents per transaction because, while it significantly reduces interchange fees from current levels (approximately 44 cents per transaction, on average, based on the survey of payment card networks), it allows for the recovery of per-transaction variable costs for a large majority of covered issuers (approximately 80 percent). The proposed cap does not differentiate between different types of electronic debit transactions (e.g., signature-based, PIN-based, or prepaid)
It's interesting to note that the cap is fixed at 12 cents and does not vary with the purchase amount. Also note that signature-based and PIN-based purchases would have the same cap.
One aspect that could prevent this new rule from hurting reward checking accounts is the fee restrictions are suppose to apply only to institutions having at least $10 billion in assets. Since the vast majority of banks and credit unions offering reward checking accounts are under this size, reward checking may not be affected. However, many believe it will still affect small institutions. According to the Credit Union Times, the fee cap "will reduce credit union income from debit card interchange."
It'll be a while before we know the full impact to reward checking and to all of our deposit accounts. The potential effects may be enough to discourage some banks and credit unions from reward checking. And if banks had been considering ending their reward checking programs, this may give them another reason. Hopefully the effects on the small institutions will be less than expected, and this will give the small institutions an advantage over the megabanks.