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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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Senate Fails to Delay Debit Card Interchange Fee Caps


Senate Fails to Delay Debit Card Interchange Fee Caps

The legislation to delay the regulation that caps debit card interchange fees failed to win enough votes yesterday in the Senate. It received 54 votes which was six votes short of the 60 needed. Without a delay, the Federal Reserve should soon be releasing the final rule on capping the fees. It's scheduled to take effect on July 21st.

The amendment's main sponsor, Senator Jon Tester, had made several compromises in the last few months in an attempt to win votes. He originally set the delay to 2 years. This first went down to 15 months, and just recently it fell to 6 months. But that wasn't good enough. I think many Senators felt that delaying this regulation would look like they were on the side of the big banks. As mentioned in this Bloomberg article, there was a lot of political concerns about supporting the Tester amendment.

Effects to Reward Checking?

When you make a purchase with a debit card or credit card, the retailer pays an interchange fee of between 1% to 2% of the cost of the purchase. Most of that fee goes to the bank that issued the card, and many banks return some of that money to their customers in the form of rewards. This helps pay for the high interest rates offered by reward checking accounts. The cap on interchange fees could significantly reduce the rewards.

The cap on debit card interchange fees is based on the Durbin Amendment that was part of last year's financial reform. It requires 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, most credit unions and small banks believe that the Durbin Amendment will drastically lower their interchange revenue.

Effect to Small Institutions?

I think the $10 billion exemption contained in the Durbin Amendment made it hard for the Senators to support the delay. Durbin continued to maintain that delaying the regulation would mostly benefit the big banks. Both credit union and community bank groups were pushing hard for the delay, but their explanations about how the regulation would hurt small institutions were weak.

One of my contacts in the industry described two ways the Durbin Amendment would hurt small institutions. First, there was concern that VISA and MasterCard may not make it easy to identify debit card transactions as being from large or small institutions. VISA has indicated that they will be able to support the $10 billion limit so this might not be a significant issue.

The second concern is from another part of the Durbin Amendment that isn't as well known as the cap. It requires that merchants have a choice as to which network they run the debit card transaction on. Cost would likely be the main factor for merchants, and all networks would be forced to lower their prices which would significant reduce the interchange revenue for all institutions even the small ones. If you want more details about this issue, refer to this research paper on the interchange regulation's impacts to credit unions.

So the above reasons may be why the group that represents credit unions warns that the failure to pass the delay "is going to create a train wreck that will affect every consumer with a debit card."

I think it's going to take some time to know how much effect it will have. However, with the expectations set that it will have a significant impact, it seems likely that banks and credit unions will begin to make changes even before they see their interchange revenue fall.

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Anonymous   |     |   Comment #1
What you don't point out is this marks the end of debit card use.  The Big banks are not going to contniue a service that becomes unprofitable.  I for one love ease of debit cards but I feel this will at a minimum greatly reduce the cap on debit card purchases, will eliminate "Free Checking" and will bring us back to the check writing phase of the 80's. 
Anonymous   |     |   Comment #2
Banks will probably start charging a fee for having a debit card as well as introduce fees on currently free checking accounts.  Some savings...  It's like taking water with a bucket from the deep end of the pool, and pouring it into the shallow end...
Anonymous   |     |   Comment #3
I agree that this is the beginning of the end of the debit card. While it's true that debit cards cost banks less than checks to process, they are also much more vulnerable to fraud, chargebacks, etc. Despite that, banks we were willing to live with those issues as long as they made a killing on the interchange fees. Now that the gravy train has ended, I agree that debit cards are no longer an attractive product for the banks - and while most consumers are OK with debit cards, that will probably change once there is a $25 annual fee and you can't use it for a purchase over $50.

I think this will also lead banks to more heavily push credit cards (whose fees aren't affected).

Anonymous123   |     |   Comment #4
To be blunt, it's about time. Reward checking accounts shouldn't exist. They're based on exhobatantly high fees collected from someone else (ie, everyone) in order to give slightly higher rates for which you must jump through hoops just so banks can advertise high rates in ads. As well, I have always shunned debit cards. Banks push them like candy for obvious reasons (to the banks) but anyone who does real research into them and wants to be protected the most should have NORMAL ATM cards and credit cards, not debit cards. With everything from overdraft fees to technically being fully responsible for fraud, debit cards were an idea that helped only the banks and their gimmicky reward checking accounts were what they used to help push them. I know many people here have them (and RCAs) but if you step back and look at it from an objective point of view, it's a good thing that these high interchange fees are going, and a good thing if people finally get smart and replace their debit cards with normal credit cards -- or better yet, back to the normal, ATM card. To those that were getting (now just slightly) higher rates in rewards checking accounts, those rates came from the fleecing of the rest of us and it's about time that it stopped. If you want high rates, there are now 5-year CDs paying higher (3%) than most RCAs. You don't get something for nothing in this world, especially from banks. It's about time this happened.
Anonymous   |     |   Comment #5
Let say the small banks are exempt from this law about the Debit card charges, then what will happen is, the big banks will start buying the small banks and run them outside of the law.
Furthermore, would visa and master card agree a debit card carrying their logo to be run as ACH on the ATM network, bypassing the visa and master card will create friction on the other end of this twisted law. How the merchants will know what buttons to push to find their charge before is sent for processing.
That is what happen when Congress puts their paws on anything, they ruin it for the consumers.
Anonymous   |     |   Comment #6
Is this country run by free market forces or the bureaucrats in Washington that started to look like a dictatorship. We all learn on our mistakes and occasional overdraft charge by the banks will not put end on our banking with them, but will make us more wiser next time.
This law was unnecessary and will hurt more than it will help.
Anonymous   |     |   Comment #7
To Anonymous123 - #4,

Just wait till the banks start charging for everything even to have an account with them, then you will realize how wrong you are about the reward checking accounts.
RCAs are self sustaining since the banks sweeps ( large amount held in your account)  in overnight Government treasures and makes up most of it back and then some left for the bank. (The banks can buy and sell any amount at any time into anything issued by the treasury without any penalties or fees as many times as they want)
The 10, 12 or 15 Debit card purchases per month are pure profit from the interchange fees and they have nothing to do with the regular customers who are not into RCAs.
51hh   |     |   Comment #8
I think some RCAs will certainly change their rates/terms/etc. for the worse, but it will be a gradual process (just like what they are doing now).  I hope that there will still be some brave (and the few) which will offer rates above 3%.  I will give up on RCAs with rates below 3%.  It is a very good run while it lasts.

I am sick with the hundreds of debit transactions per month and is paranoid about the risk of debit card usage these days anyhow.  It will be a "mercy-death", so to speak. 
mrvirgo   |     |   Comment #12
Whenever politicians stick their noses into the free market, the unintended consequences are inevitably worse than the original problem. Thanks a lot Dick, you weiner!
Will   |     |   Comment #13
Anonymous #2: You're wondering about possible changes re fees for checking accounts and debit cards. With regard to checking account fees, BofA for one, is ahead of your post because recently their "My Account" checking changed its requirements so that it would no longer be a free account for me. However, I'm fine with the change because their "eBanking" checking acocunt is free as long as you do all transactions online or at an ATM machine or by using paper checks and don't use a teller for any services, and also if you receive their statements electronically. I for one am happy with the eBanking account since I like the convenience of online banking and have no problem using ATM machines, also. When a bank offers a free checking account available to any customer who is happy with a particular kind of account (i.e., makes all transactions online/using the bank's ATM machines/using paper checks, and receives bank statements electronically), it doesn't seem unfair that it can charge a customer for another type of account based upon what the customer wants from a checking account  There are a large variety of accounts availoable at banks now and I can't see that ending anytime soon, so if a customer isn't happy with the accounts offered by his or her bank, the obvious option is to start banking elsewhere.  I only use an ATM card anyway and don't care if a bank imposes a fee for being issued a debit card.
Shorebreak   |     |   Comment #14
The large banks will just increase their account minimums in order to avoid a monthly fee.
Anonymous   |     |   Comment #15
I have several debit cards and never have used them to purchase anything since I first got one (which I think goes back to the 1990s).  They pass these out like ATM cards.  ATM cards were originally supposed to save the bank a lot of money, but instead have turned into a revenue generating device.  Same as with the debit cards.
CraigPD   |     |   Comment #16
Wil: "My Account" checking changed its requirements so that it would no longer be a free account for me. However, I'm fine with the change because their "eBanking" checking acocunt is free as long as you do all transactions online or at an ATM machine or by using paper checks and don't use a teller for any services, and also if you receive their statements electronically."

etc. etc. etc.

Two ways to interpret - Get with the program OR digest contextual process.

The problem we're the "stunt frogs" in the financial animal kingdom.
Anonymous   |     |   Comment #17
CraigPD: Anonymous 123 has it right: "You don't get something for nothing in this world, especially from banks."  To avoid a feeling of being a "stunt frog" in the "financial animal kingdom" expect to pay for something you're getting.  Anonymous #3 made a comment about the debit card gravy train now ending--a gravy train NEVER IS a gravy train for everyone. 
CraigPD   |     |   Comment #19
I'm onboard A123's comment (voted 1 without hesitation).  But what I find amazing is most "new age" premium banking services were truly free for 35-40 years up until 5 years ago when the (gravy?) train began to derail, exceeding structural and functional design limits.  Back in the "dark ages" an account balance and reasonable fees for ancillary services were all the inducement necessary to receive basic compensation (>2% apy) and you needn't perform exotic circus feats for benefaction.  Was that something for nothing?  I think not.  Rather, it seems reversion from extremes has once again overshot the mean - at least from a reasonably objective historical perspective.
Anonymous   |     |   Comment #21
Did i miss something--I thought the debit card interchange fee cap rule only applies to debit card purchases used with a pin?!? If i use my debit card as a credit purchase with no pin, then isnt that exempt since it uses the same merchant processing network as if it was a credit card?
Anonymous   |     |   Comment #22
The Morons with checking account can not balance their accounts to avoid fees, so they ask the Liberal Congress to do it for them, now the rest of us will pay for those stupid people.
Anonymous   |     |   Comment #23
To Anonymous - #21,
The debit card is at same time an ATM and Credit card, depend in how is used.
If you enter pin, is processed via ACH system or ATM, if you sign for it or request debit or credit is processed as CREDIT card via Visa or Master Card network.
 I hope this clears it for you.
Lisa   |     |   Comment #25
Enough with the mindless, childish "liberal" bashing. The Republicans didn't stop this bill, did they? And heads up, this is not a free market economy and never has been. The goverment manipulates the economy to favor large corporations and the wealthy all the time, from both sides of the aisle.

It's almost cute that some of you think the government is stealing from you to give to people you think are unworthy, when they are in fact giving it to Wall Street executives. Unless by "bunch of bums" you meant "executives at Goldman Sachs".
Anonymous   |     |   Comment #26
I use Regions Bank and have just been notified of a $4 fee if I use my debit card, which I use all the time for convenience. To avoid the fee I will have to use either cash or go back to writing checks (how old fashioned is that)

You mention that if you use your debit card as a credit card I can avoid the fees, is that right? some places especially online purchases the only way to pay is debit/credit cards. This means we have to pay the fees regardless of which way we pay. They will soon be charging us to deposit money or even go into a bank.
Anonymous   |     |   Comment #27
Anon#26 To answer that, switch banks. Tell your bank if they think they can shaft you, you'll pull your money and go elsewhere. If it becomes too big a deal swap to a different bank that is trying to openly compete for new customers by giving less fees or better rates.