About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Fed Proposes Large Cut in Debit Card Interchange Fees


Fed Proposes Large Cut in Debit Card Interchange Fees

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.

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pearlbrown   |     |   Comment #2
I think we will see an increase in the number of debit card transactions required to qualify for the RCAs.  For example, an institution now requiring 12 debit card transactions will increase the number to 18 or 20 to make up for the lost revenue.
Anonymous   |     |   Comment #3
Though it will almost certainly affect RCAs if the rule goes into effect, all I can say is, it's about time. The fees banks collect on what costs them virtually nothing is a sham.

PastTense   |     |   Comment #4
Ken, surely you talk to, correspond regularly with some banking people about there reward checking accounts. What do they say the effect will be?
Anonymous   |     |   Comment #5
Mr. Durbin just wiped out both reward and free checking!  The other poster said it costs bank "virtually nothing" for those transactions; that is absurd, everything has a cost.  On the software side alone there were billions spent for monitoring and anti-fraud systems; and still there was 56 billion in fraud in 2009.  Who pays for that fraud?  The banks, because that's what the law says.  Now instead of merchants sharing the infrastructure cost for a system that massively benefits them, it will be passed through banks directly to consumers.  But, I'm sure the pro-consumer merchants will drop the cost of all their products across the board to make it up, no worries.  Research what happened in Australia after their caps, see if any consumer thinks they benefitted.
Anonymous   |     |   Comment #6
Calmer heads and common sense should prevail here... Read the actual post and news.... The proposed Fed rule is only supposed to apply to banks with $10 billion or more in assets... Thats TEN BILLION... I think it's pretty safe to assume that most, not all perhaps but most, current rewards checking accounts are being offered by institutions with smaller asset bases than that... Last time I checked, BofA, Chase, CitiBank et al. weren't exactly leading the ranks of RCA account issuers.
Alan   |     |   Comment #7
Currently, merchants build into prices we pay the cost of credit and debit card transactions, effectively denying (per card rules) any discount to those who pay the old-fashion way, by cash.  Only some gas stations, typically non-brand outlets, offer a cash discount price.

We pay in so many ways for the heavy charges Visa, MasterCard, and the banks impose on us, as through interchange fees, and foreign transaction fees (the latter not touched by the Fed so far).  These fees far exceed the cost of providing the services.  It is curious that many folks who froth at the mouth about taxes do not seem that concerned when private oligopolies impose their forms of taxation.

Here's to the Fed for standing up for the public!  

PastTense   |     |   Comment #8
Anonymous (Post 6).

The banks and credit card companies do no collect the fees; Visa and Mastercard collect the fees and remit a significant part of them to the banks. So the question is if Visa and Mastercard are going to adopt a two fee charging system to the merchants (one for the bigger banks and one for those less than 10 billion) or if they are going to adopt a single price structure. I don't see any reason for them to adopt a two price structure--single price is both simpler and there is no advantage for them to do so since it will disadvantage the big banks which dominate VISA/MC.


PS. I asked Ken to tell us what the banks and credit unions are saying they plan to do--but he has refused to answer.
glxpass   |     |   Comment #9
PastTense, post #8:

"PS. I asked Ken to tell us what the banks and credit unions are saying they plan to do--but he has refused to answer."

"Refused to answer" seems a bit strong.  I'm sure Ken can only say what the Banks and CUs are willing to make public, and you're not giving him much time to even investigate this, if he decides to do so.  Let's wait and see.

Given the exemption from the reasonable interchange fee subsection of the Durbin Amendment that most, if not all, RCAs will fall under, it's a stretch at this point to say that the enactment of the Amendment signals the death of RCAs.
Anon1234   |     |   Comment #10
To PastTense:  you asked Ken to tell us what the banks and credit unions are telling him they plan to do a mere 18 hours ago.  I'd hardly characterize that as "he has refused to answer".   A) Financial institutions may not be commenting or B) he may be working on one or two other things. 

Ken, thanks for all your hard work and the great information on this blog! 
Anonymous   |     |   Comment #11
I feel like merchants have lost track of how much it costs to deal with currency.
rj   |     |   Comment #12
This will certainly eventually affect RCAs.

But, times change.

I know this is something Walmart has been fighting for some time.
ATMdude   |     |   Comment #13
I have reviewed the postings on this page.  Very interesting.  I noticed that someone stated that it will only impact institutions the size of 10 billion and above.  Has anyone stopped to think that VISA USA does not yet have the capability while processing the authorization to make a determination if the institution is less than 10 billion or greater than 10 billion?  If there is not any technology in place then how will my 500 million dollar community bank get paid?

This is reprehensible legislation passed by a Congress that does not read their bills.  In a free market economy interchange should be unregulated.  If the merchants think interchange is too high, then the merchants should stop taking credit cards for payment for goods and services.  VISA and MasterCard should immediately institute or “dream up” a new volume based fee to recoup this impending loss.
pearlbrown   |     |   Comment #14
ATMdude #13, the issue of the proposed rules released by the Federal Reserve is separate from the issue of how they will be implemented.  The Federal Reserve concentrates its efforts on what (the rules) and leaves it to financial institutions to work out the how (details of how to implement them). 
StrangerThings   |     |   Comment #15
To ATMdude: Several sites; including this site and the FDIC and NCUA; all show current assets of listed institutions, current as of the last financial quarter. Sicne this data i readily available; I have no doubt that the people at VISA USA have at least one person on staff who is capable of setting up a computerized program to extract the data from the aforementioned public sites.


And do not forget that there is a difference between CREDIT cards and DEBIT cards. The article and the Fed make this distinction, and I hope you can as well