By Jeff Eusebio Debit cards are under attack. Some well-meaning legislation in Washington called the Durbin Amendment is going to result in higher fees for consumers, potentially the end of free checking, and a shift away from debit cards in general. Why? Let's take a look:
- Currently, banks charge retailers a fee every time you use your debit card (an interchange fee). The current average fee for a signature debit card transaction (when you use your debit card like a credit card) is $0.56 and the interchange fee for a PIN transaction is $0.23.
- In less than a month, Congress is slated to implement the Durbin Amendment to the Dodd-Frank Wall Street Reform Act (which passed with bi-partisan support). This hotly-debated amendment would cap interchange fees for debit card usage to $0.12.
- The intention of this bill was to invigorate the economy with savings to retailers, which would theoretically be passed down to the customer.
- With this reform, debit card use–and banking in general–will no longer be as free and simple as it used to be. Banks are already thinking of ways to make up for this impending revenue loss.
- To make up for the financial hit that banks are taking because of this new legislation, many banks are also killing their debit rewards programs.
Consumers are the losers. Retailers are the winners.
- Three economists collaborated to measure the impact the proposal will have on consumers, and the results aren't pretty.
- The trio predicted, for example, that the number of unbanked Americans will rise as more lower-income households reduce dependency on previously free or low-cost checking accounts.
- Consumers and small businesses can expect to take a combined hit of between $33.4 billion and $38.6 billion during the first two years if the proposal takes effect. "Large retailers would receive a windfall," the economists wrote - between $17.2 billion and $19.9 billion in the first two years alone.
Many FamilyMint users are members of credit unions. Does this legislation impact credit unions too?
- The fees are particularly essential for credit unions: far smaller than banks, they cannot take advantage of economies of scale to reduce the cost of servicing their customers. And because they generally charge lower interest rates, annual fees and late penalties, they lack the monetary cushion that for-profit banks enjoy. Credit unions truly do use the merchant exchange fees to serve their customers.
- A survey by the National Association of Federal Credit Unions found that nearly half of respondents are considering eliminating free checking to make up for lost fees. A similar proportion indicated that they would eliminate or cut back on rewards programs, and almost 9% professed that they might have to lay off staff members.
- This is significantly different from the threats of for-profit banks, who are hiring at a brisk pace, make thick profit margins on almost all customers, and are paying out hefty bonuses. A reduction in debit swipe fees, which make up 20% of non-interest revenue for credit unions, seems likely to negatively affect customers and to force layoffs.
Because debit cards can be such a helpful teaching tool for teens--as well as convenient for parents--the unintended consequences of this amendment make it bad medicine. If you'd rather not see this happen, please join us in sending a letter to your Senator.