The Beginning of the End For Debit Cards?

Is it time to add debit cards to the endangered species list?  Can anyone imagine a financial services world without debit cards?  Is that even possible considering the growth of debit card transactions?

Not only is it possible but some bankers are even predicting it will happen sooner rather than later if the Federal Reserve has its way and caps interchange fees on debit card transactions.  An interchange fee, more commonly referred to as “merchant fees” or “swipe fees” is the fee paid by the merchant for the ability to accept payment in the form of plastic.  Right now the average fee paid by the merchant for debit card transactions is about 44 cents.

If the Fed’s fee cap goes as planned the fee will be capped at 12 cents, which represents only 27% of what is being charged today.  That cap is almost criminal considering what it will do to bank revenues.  And, much like its CARD Act predecessor, the fee cap will likely result in adverse treatment of the cardholders, who are largely in the dark today regarding swipe fees.  There is no line item on your invoice or receipt that says “Swipe Fee $.44”

The challenge facing the financial institutions that issue debit cards is whether or not to continue to issue them in the wake of fee controls.  According to an article in the San Antonio Times this could cost the industry some $10 billion in fee income.  They’re going to want to recoup that loss, which means subsidizing in the form of new fees elsewhere.  Already large lenders are looking at ways to re-bake their financial services cost structures if the caps are approved.

Another problem with the fee caps is that consumers won’t likely gain anything from it.  The interchange fee is generally a fraction of what’s even paid in taxes and passing the cost on to consumers is unlikely to happen, regardless of what you may hear from merchants.  Mom and pop merchants will gain only slightly but the big retailers will win on the front end with the added margin.

The losers in all of this will first be the big banks, who seem to be in legislation cross hairs almost daily.  Consumers will lose as well because of how the fees will be spread across all customers, not just debit card users.  Smaller financial institutions will win because they’re exempt from the fee caps and will likely gain some volume because of big bank customer attrition.  Merchants will win big, really big.  Debit cards lose, big time.  In fact, it’s very likely that we’ll see some large issuers reduce their debit card footprint.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Categorised in: Credit Cards, Money & Identity

This post was written by John Ulzheimer