Debit card swipe fees cut, are there still problems?

Today the Senate voted down a bill by Sen. Jon Tester (D-MT) that would have delayed the Durbin Amendment from the Dodd/Frank bill.   Sen. Richard Durbin’s (D-Ill) amendment puts a cap on the swipe or interchange fees that banks charge merchants for accepting debit cards.  Banks have been charging on average  44 cents or up to 2% of transaction  for every transaction, bringing in about $16 billion in revenues.  Merchants often will increase their product prices a bit to make up for this lost revenue.  The amendment would cap the fee at about 12 cents a transaction.  This will drastically cut the additional revenue that banks are bringing in.  The merchants believe that these lower costs will allow them to slightly lower prices, since they will not be hit as hard with the fee.

In theory, this seems like a great idea.  Why not cap these fees and limit banks from additional profits, while allowing prices to go down.  However, there are some other factors that make everything not so perfect.  In fact, I was not in support of the amendment as written for several reasons.  First of all, banks don’t like losing revenue.  They are going to find ways to make this money back.  One way is they could go back to pushing credit.  This amendment applies to debit cards and not credit cards.  Therefore, banks can scale back on their advertising of debit cards and move back to pushing using your credit card as a way to get these fees back.  Another option for the banks are to add new fees to accounts.  Banks love adding new fees and have already begun to phase out the free checking.  They are creating new fees for services to make up for places they are losing revenue, and this could lead to more of that.

The more troubling factor here could be the impact on prepaid debit cards. For low wealth families these are a growing alternative to traditional banking options.  In the Durbin Amendment, there is a cap exception to small banks with under $10 billion in assets.  The idea is that these smaller banks and institutions don’t have the same capacity of the big banks to deal with a fee cap and therefore are exempt.  This creates an interesting dilemma in the prepaid card market.  Pretty much every prepaid card provider fits under this exemption.  In fact, Russell Simmons, creator of the Rush Card, fought for this exemption in order to protect his profits.

This may not be a good thing though and could create problems for users of this card.  These prepaid providers can continue to charge much higher fees than the big banks can putting the merchants in a tough place.  Merchants would rather pay the lower fee to everyone because it benefits their bottom line, but this exemption means they will still have to pay the higher amount for a number of transactions.  Merchants may start to not accept prepaid cards so they don’t have to pay the higher fee.  Another option is they could charge a fee to users of these cards to make up for the higher costs.  No matter which option they choose, low-income users of this card will have to pay more for the purchases than those who use traditional bank debit cards.  I don’t like the potential impact this could have on poor people.  Why should they have to pay more so people like Russell Simmons can protect their profits?  I guess in order to avoid higher costs they could always go back to using check cashers and carry more cash.  Oh wait, that also carries a high cost.

Some of you may say, well they can go back to using a traditional bank, and that is a fair statement.  However, most low wealth people do not generate enough income to have low fee accounts now that banks are doing away with free checking.  So as I stated earlier, banks will create new fees for accounts that are used by low wealth individuals.  There is no way around the fact that this amendment raises the costs on low-income individuals.

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