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Final Rules for Debit Card Fees Released - Effects on Checking Accounts?

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Today the Federal Reserve Board approved the final rules for the debit card interchange fee regulation. For banks it was a significant improvement over the preliminary proposals from last December. The debit card interchange fee cap was raised from 12 cents to 21 cents with an extra 0.05% of transaction price to cover fraud prevention costs. The higher cap is intended to ensure all reasonable costs are covered.

Another win for banks is that the final rule delayed the implementation date of the new cap. Instead of July 21st, the effective date will now be October 1, 2011.

You can read the draft of the final rules at this Federal Reserve page. The Staff Memo to the Board contains a summary of the rule, and the full details are contained in the Federal Register Notice. This CNNMoney.com article has a good overview of the final rule.

Small Bank Exemption

The cap on debit card interchange fees is based on the Durbin Amendment that was part of last year's financial reform. It required the Federal Reserve to implement caps on debit card interchange fees. The Durbin Amendment exempts small institutions with less than $10 billion in assets. However, there were widespread concerns that this exemption would not protect the small institutions. That led to Senator Tester's attempt to delay this regulation, but that failed to pass the Senate earlier this month.

The draft report of the final rule has a good explanation of how small banks could be affected. Here's an excerpt from that explanation:

Many issuers expressed concern that this exemption will not be effective because networks would not institute, or could not sustain, a two-tier fee structure. If two-tier fee structures are implemented, these issuers believed that merchants would discriminate against cards of small issuers in favor of cards with lower interchange fees. Moreover, several issuers contended that even if networks institute a two-tier fee structure, merchant routing choice and steering would put downward pressure on interchange fees over time, thereby eroding the ability of small issuers to recover their full costs through interchange transaction fees and ultimately reducing any difference in interchange fees for small issuers.

The Durbin Amendment didn't include provisions to allow the Fed to make rules to protect the small banks from these concerns. For example, they can't require the networks to maintain a two-tier fee structure and they can't exempt small banks from the portions of the rule dealing with network exclusivity. However, the Fed did include some provisions in the final rule that may help a little.

Changes at Large Banks

The higher caps in the final rule may encourage the large banks to refrain from an all-out elimination of free checking. We'll have to continue to keep an eye out for new fees. Higher minimum balances and more activity requirements will probably be added to checking accounts at many large banks.

We will probably see the termination of many debit card reward programs from the large banks. One example might be Bank of America's Keep the Change program. With these new caps, there will be little incentive to encourage customers to use their debit cards. Most of these programs were never that great of a deal for depositors. So I'm not too worried about losing these.

Credit card perks should continue, and in fact, we may see the large banks place more emphasis on credit cards instead of debit cards since these interchange fee caps do not affect credit cards.

Changes at Small Banks and Credit Unions

What worries me the most is the effect on credit unions and small banks which offer high-interest reward checking accounts. The vast majority of reward checking accounts come from small banks and credit unions. The debit card interchange fees help pay for a sizable portion of the higher interest rates.

If the above concerns prove real and interchange revenue for small banks and credit unions does decline, then interest rates on reward checking will likely fall. However, it seems that this decline of interchange revenue should be slow. First the new cap won't take effect until October 1st, and the network exclusivity rules won't completely take effect until April 1, 2012. Once these take effect, the conditions described above would take time to erode the interchange fees.

One of my concerns is that the banks may see this new regulation as a good excuse to make cuts to their reward checking programs. If the reward checking wasn't as profitable as they had first anticipated, the publicity of this regulation provides for a convenient time to announce changes.

  Tags: checking account

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Comments
11 comments.
Comment #1 by mak1118 posted on
mak1118
The banks have been taken good care of while the majority of us are being pummeled but should we really have expected anything else? It is a beautiful thing to see the so called free market system at work, manipulation at its finest all in the name of the stock market that is really what it's all about.

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Comment #2 by Greg (anonymous) posted on
Greg
The new debit limit benefits exclusively retailers, although their CEOs and lobbyists are telling us that consumers will be the ones who will reap the biggest advantage from the cap on debit fees.  Any revenues lost by card issuers will translate directly into a positive revenue flow of an equal aggregate amount for retailers.

 

It is very unlikely that any of the windfall will be passed on to consumers. Anyway, even if that did somehow happen, consumers would still be net losers, due to the fact that banks will inevitably make up for their interchange-related losses by generating higher revenues elsewhere.  Actually, they are already doing it.  http://blog.unibulmerchantservices.com/senate-hands-u-s-retailers-a-16b-win-over-card-issuers

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Comment #3 by mak1118 posted on
mak1118
Check back to the end of last year and see how much tougher they said they were going to be on the banks and how much they backed off from there and then tell me the banks didn't get another break.

3
Comment #4 by 51hh posted on
51hh
Thanks much, Ken, for the timely/thorough coverage on this important topic as well as analysis for the potential impacts to consumers.

My take is that it is still too early to assess the impacts until all banks (large or small) react to this ruling (with changing T&C, programs, and fees).  I suspect the impacts would be real but gradual.

7
Comment #5 by mrvirgo posted on
mrvirgo
All I know is that Heartland Community Bank of Arkansas which has had a cap of 30K since 2008, is suddenly dropping its cap to 15K. Coincidence? I think not. The meddlesome morons in Washington who want to regulate the economy into oblivion may succeed yet.

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Comment #6 by Shorebreak posted on
Shorebreak
Did you expect anything different from the Federal Reserve Board in it's decision? Gee, MasterCard and Visa shares up 11 percent. We have a pro-business, anti-consumer mindset in power now. Get used to it.

2
Comment #7 by Anonymous posted on
Anonymous
mak1118 (post #1) got it right...As economist Simon Johnson points out, the recent failure by the Senate to break up the too-big U.S. banks (he astutely observes that not that many years ago there weren't any similarly massively large U.S. banks relative to GDP) as proposed in the bill of Senators Brown and Kaufman, is really tantamount to continuing the ticking of a time-bomb clock for the global economy (at least the bill received 31 votes). Unfortunately, no surprise if another big financially-generated "downer" is lurking somewhere around the corner. Attempts of the politicians at the Fed and of other "Feds" in trying to keep higher-risk takers in the economy successfully "afloat" through assisting the the Madison Avenue Stock Market's performance are no different from a physician treating a serious medical condition with bandaids, aspirin, etc.

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Comment #8 by mak1118 posted on
mak1118
If any of us had to state are net worth we would have to figure out what all are assets are and are liabilities today but the rules have been manipulated for the banks so they don't have to mark to market so who knows what is really on their books, if that is not manipulation to help the banks what is it?

2
Comment #9 by mak1118 posted on
mak1118
If you listen to Bernanke and Obama they always comment on see how well the stock market is doing that is what they are targeting. They hold rates at zero and buy are own treasuries to manipulate the rates even lower all to benefit the people that caused the problem. Never learning from the past the low rates are what caused the phony boom from 2003 to 2008 and caused the major bust that we are living through now and back then it was Greenspan who was targeting the stock market. The savers want to save and not be pushed into riskier assets where they can be hurt, hopefully one day the savers can be rewarded for doing the right things instead of punished. I will vote for anybody that will abolish the FED it is their manipulation of the rates that causes all the booms and busts , they are the FED and they are out for the banks. 



 

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Comment #11 by share tips (anonymous) posted on
share tips
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