Bank Threats Have Fed Wavering on Debit Fee

NEW YORK (LowCards.com) -- Last December, the Federal Reserve proposed to cap debit card swipe fees at 12 cents per transaction, a surprisingly sharp decrease from the current fee averages between 1% and 2% of a transaction. Merchants fought hard for this limit on interchange fees, but in the end, it could backfire on retailers and consumers. Even the Federal Reserve governors are now questioning the impact this bill will make on consumers.

The Fed will issue final rules for the interchange fee standards next month and the rules should go into effect in July.

Banks say they might limit debit card purchase to $50 or $100 if Congress accepts new rules for swipe fees.

Banks aren't accepting the huge cut in revenue without a fight and are trying to delay the deadline. According to ABC News, some big banks, including Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM), might limit each debit card purchase to $50 or $100 if Congress accepts the new rules for swipe fees. This could be a scare tactic, but banks have proved again and again that regulations that cost them eventually get passed on to consumers. This can come in the form of new fees or a cut in benefits or rewards, and many banks are already adding fees to bank accounts in response to other regulations.

Debit card limits might force consumers to use checks, cash or credit cards for larger purchases. In the very near future, $100 might only cover a tank of gas for some consumers.

Limiting debit card usage would be a big blow for consumers. Turning to credit card usage for large purchases could quickly push cardholders to the credit limit. It could significantly increase the balance they carry from month to month, costing them dearly in interest penalties and possibly even hurting their credit score.

If consumers turn to cash, this could lower sales volume for retailers, since consumers spend less when they pay with cash -- it is painful to hand over hard-earned dollars, so consumers paying with cash are more likely to buy only what they really need. (While a return to cash purchases would hurt retailers, it would be good for the household budget.)

There is still time for a surprise ending. According to The Associated Press, the Federal Reserve has told Congress it may reconsider its proposal to limit the fee that banks charge merchants for debit card. Fed Governor Sarah Bloom Raskin told the House Financial Services Committee on March 2, as it explored the decrease in interchange fees and other impacts of the Dodd-Frank legislation, that the Fed has received thousands of comments on the proposal and expects many more. She also said the Fed was uncertain about how much of the savings would be passed to consumers and how much banks would boost their fees.

The National Retail Federation estimates that debit card fees total about $20 billion annually. Bank of America, the biggest issuer of debit cards, said last year that the fee limits could cost the bank between $1.8 billion to $2.3 billion each year.

-- Reported by Bill Hardekopf of LowCards.com.

Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."