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Debit Card Swipe Fees Could Shrink, But Will Banks Punish Consumers?

It’s the lobby of retailers versus the lobby of retail banks. Retailers claimed a small victory recently when a U.S. District Court struck down a rule that capped debit card swipe fees at about $0.24 a transaction. The original cap proposed by the Federal Reserve was $0.12 but as the Federal Reserve operates more for banks than retailers or customers, the regulator gave into industry pressure to set the cap higher. Now the Fed must, over the next few years, revise its rule in favor of the merchants.

From the perspective of banks and credit unions, offering debit card service to customers is expensive. The industry argues that the money to support any service must come from somewhere. There’s nothing new or surprising about this concept, it’s generally how any business works. But perhaps because of service compartmentalization and the pressure for each “department” within a company to be profitable on its own, there’s some misguided notion today in the industry that each service must pay for itself.

So financial industry experts will say, and rightly so, that banks losing a profit opportunity on one end of a transaction, in this case the higher cap on debit card swipe fees, will look to other avenues related to debit cards to replace that profit opportunity. Make no mistake, this is a question of profits, not just revenues. The banks, overall, are doing just fine, thank you very much.

With the economic boost for banks through and after the recession, in a society where the financial industry expects that it constitutes all four pillars of the economy and enjoys the arrogance that comes with this policy-induced self-importance, the industry feels it has the power to do whatever it likes, never mind those the industry services, like merchants and consumers. So when the court gives a point to either the merchants or customers, banks threaten that those who will ultimately suffer are the customers or merchants, never the industry. After all, even if not every bank is too big to fail, the industry is as a whole.

There is no law that says that banks have to recover lost profit as a result of capped debit card transaction fees by charging more for debit cards somewhere else, but because the financial industry has this invincible status afforded to it by policy, they can do whatever they want. What is likely to happen is that customers who enjoyed the use of debit cards for free could be charged a monthly fee or deal with limited monthly transactions. In an industry where each department was not pressured to be profitable and investors looked at each institution as an entity, revenue from other operations within each bank could pay for consumer-oriented services.

Revenue from other sources is down, so that concept is more difficult for bank to achieve today. In an earlier time, profit from interest charges on commercial loans and personal loans kept the ability for banks to offer free services to customers, but with low interest rates today and the industry continuing to limit loans, that revenue source is tighter, putting even more pressure on other services to be profitable.

Stepping outside to look at the larger picture, debit cards are not great products, at least when compared with credit cards. There have been some improvements, notably more protections for consumers who use them, over the last decade, but credit cards simply offer more features that benefit consumers. This comes at a cost of credit card users spending more, the features that credit cards offer eventually result in higher prices for everyone, and swipe fees for credit cards can be much higher than those for debit cards costing merchants more, but on a point-by-point basis, credit cards are better choices for consumers than debit cards.

Not everybody can benefit from credit cards, and although cash might be an ever better option that debit cards, the convenience of plastic takes center stage in understanding why the payment method is so popular, and in assigning the importance of seemingly minor details like swipe fees.

Banks are finding another way to avoid the swipe fee cap on debit cards. Banks are increasingly turning to prepaid debit cards opposed to debit cards linked to checking accounts. Prepaid debit cards were once the only plastic spending tools available to people with bad credit or a spotted checking account history, and they were operated that companies who were more likely to cater to low-income customers. Mainstream banks are more and more taking over the prepaid debit card industry.

The industry claims it just wants to bring in more customers and help them maintain their money appropriately, but the real impetus is profit, naturally; prepaid debit cards are not subject to the same caps as debit cards, at least not today. Prepaid debit cards present the opportunity for more profit, whether via transaction (swipe or interchange) fees, monthly fees, refill fees, balance-checking fees, or overuse fees. As a result of this increased profit opportunity banks will continue to downplay the importance of a checking account with debit card access in favor of prepaid debit cards, despite there not being much of a functional difference for the consumer.

Do you use your debit card as your primary method of payment? Would you continue to use your debit card if your bank charged a monthly fee of $10? Do you see yourself replacing your banking set-up with a prepaid debit card system as this continues to become the preferred banking system within the industry?

Photo: Flickr

Published or updated August 8, 2013.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 4 comments… read them below or add one }

avatar 1 Anonymous

Mega Banks are going to get theirs, one way or another, as they are beholden to shareholders.

I have never owned a debit card and likely never will, preferring the rewards I get from a credit card.

I’m thinking of switching from my Mega Bank to a Credit Union though, just on principle.

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avatar 2 Anonymous

Sounds like yet another step that should be made for customers, yet will likely turn against them. Shame that there is not much morality in the businesses these days.

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avatar 3 Anonymous

My bank (HSBC) doesn’t charge any extra fees for using debit cards, so I occasionally use them. But you’re right – credit cards make more sense thank to their reward programs and better security features. The only people who may benefit from credit card use are those who need help controlling their spending habits. But then again, they may be better off sticking with cash…

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avatar 4 Anonymous

With today’s online fraud epidemic a prepaid card makes perfect sense. I just got prepaid card after fraudulent charges left my account $400 lighter. Hackers & dishonest online games, will do anything to get ahold of our money. And with the help of huge corporations such as iTunes, Facebook Payer, Inc & Paypal (yes PayPal)…no one’s money is safe. Although, the more you have, the more protection is available. The wealthy have access to lawyers. The lower income people do not. Even Middle Income people cannot afford lawyers to fight corporations that pay off unscrupulous online schisters. Thank God for Small Claims Court. And for prepaid cards. There’s only so much available & if connected to a responsible bank, charges can be reversed. Unfortunately, I had Capital One 360 online banking after Ing Direct closed it’s doors to us. Because I had iTunes behind me, I erroneously thought my money was secure. It wasn’t. Almost small daily charges were being paid in time when I had no internet & no credit card on iTunes. But the game I was playing had the card number. So they charged & charged & charged. And iTunes paid. My mother was ill. I wasn’t buying anything plus I was moving. Impossible says iTunes. Really? I have the dates of the charges & the dates of my move. I would’ve had to be online 24/7, including while I was driving on the freeway 250 miles one way. My mother’s house has never had internet. I was there every night until she passed. And then I was grieving and preparing for the services. Yet, it took Capital one all of 3 days to send me an email saying that they found no errors. I beg to differ. iTunes returned my money. So did PayPal. But iTunes can only pay 90 days worth. The rest was up to Capital One 360. For this corporation $400 is a pittance. For me it’s medications, food and medicare, along with rent, insurance, phone etc. I’ll let Small Claims decide. From what I’ve read, I have a good chance for a refund. There are thousands of complaints against this bank, that I know of. Now I understand why.

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