Your Guide to the Debit Card Fee Changes

The shift could end up costing consumers more money.

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You might think that Washington would be all about oil, jobs, and immigration these days. But the sleeper issue of the summer is turning out to be none other than debit card fees. Specifically, the fuss is over the fees that merchants must pay every time consumers swipe a bank debit card or prepaid credit card to pay for a purchase.

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The debate started when Senator Durbin (D-Il) offered amendment SA 3989 to the proposed Restoring American Financial Stability Act of 2010. Among other things, the amendment as originally proposed would give the Federal Reserve Board the authority to cap the fees, called interchange fees, merchants have to pay the bank that issued the card when a customer pays with a debit card. Objections to the amendment have come from every direction.

First, state treasurers objected to the amendment. States use prepaid credit cards to distribute unemployment and other benefits checks. With prepaid cards, states save millions by not having to mail and process paper checks. The fear was that by limiting interchange fees, the banks and payment networks (Visa and MasterCard, for example) would pass these costs over to the state governments. These objections resulted in a proposal to exclude from the amendment prepaid cards used by state governments to distribute benefits.

Second, consumer groups complained that the amendment could hurt the unbanked. Many families without access to traditional banking products rely on prepaid, reloadable debit cards. Thanks to healthy competition in the market, the cost of these prepaid cards has dropped significantly over the past few years. The result is that it is easy to find prepaid debit cards with no fees. The fear was that SA 3989 would cause banks to push these costs onto consumers, raising the cost of reloadable debit cards. These objections resulted in a proposal to exclude reloadable prepaid cards from the amendment.

Third, Visa and MasterCard raised objections. While most of the interchange fee goes to the bank that issued the debit card, for Visa and MasterCard branded cards, they too get a small cut of the fee for processing the transaction. Visa and MasterCard objected to the amendment, arguing that artificial limits on interchange fees would hurt consumers by reducing the rewards offered by debit cards and increasing the fees. The result was an agreement to exclude from the amendment a cap on the portion of the fee that goes to Visa and MasterCard.

Finally, community banks and credit unions complained that the loss of interchange fees would be particularly burdensome on these smaller financial institutions. The result was to exempt financial institutions with less than $10 billion in assets.

So what’s left? The amendment still covers the debit cards issued by larger financial institutions. The likes of Citi, J.P. Morgan Chase, and Bank of America would likely find the interchange fees they can charge merchants for debit transactions significantly reduced. While this change may be good news for merchants, it’s likely bad news for consumers.

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Today, most large financial institutions provide Visa or MasterCard branded debit cards to their customers for free. These cards are free to use for purchases, and many also come with travel, cash back, or other rewards. With artificially lowered interchange fees, however, these free perks may come to an end. In addition, because traditional credit cards are not part of the amendment, large banks could steer their customers away from debit products and toward credit cards. And while merchants may reap a windfall, it’s not at all clear that they would pass these savings on to consumers.

As the saying goes, there is no free lunch. And this lunch could cost consumers plenty.

DR is the founder of the popular personal finance blog, the Dough Roller, and author of 99 Painless Ways to Save Money.