Judge's Ruling Could Mean the End of Debit Cards (But Don't Count On It)

NEW YORK ( TheStreet) -- A recent judicial ruling could lower the fee amounts banks can charge on debit card purchases -- and that could set the stage for banks to abandon, or more likely alter, debit cards altogether.

Washington, D.C., District Court Judge Richard J. Leon ruled recently that the Federal Reserve hadn't satisfactorily followed the direction of Congress in imposing limits on debt card fees. Leon also implied that the Federal Reserve was too lenient with banks on fees, suggesting they had more room to cap fees and presumably help both merchants and consumers.

The fee caps stemmed from language in the Dodd-Frank Financial Reform Act, specifically from the so-called Durbin amendment mandating a cap on the debit card fees banks could directly charge merchants and retailers.

Those fees cut bank debit card fees significantly, with larger banks such as Bank of America ( BAC) losing $1.7 billion in debit card revenue last year. Now that banks are looking at even smaller cap limits, bank industry observers are asking a serious question:

Will debit cards survive another cut in fees?

B.C. Krishna, a veteran banking industry observer as well as president and CEO of online payment tool provider MineralTree, says debit cards will be hard to jettison -- but there could be other repercussions to bank consumers.

He says many experts speculate that consumers will end up footing the bill in the form of higher overdraft penalties, account maintenance charges and more fees and restrictions on checking accounts. Others speculate that this could be the beginning of the end for debit cards.

His belief is that the reality is somewhere in between.

"I doubt that this ruling will signal the end of debit cards," Krishna says. "The debit card habit is deeply ingrained among consumers and will be hard to shake. It is a good product. After all, why extend yourself with unneeded credit? Not only are debit cards convenient, but they offer protection against overspending."

Krishna doesn't think there will be any immediate impact to consumers from the judicial ruling, although changes could well occur if the rate cap is sliced further.

"Could we see a monthly fee being charged for debit card use? Perhaps," he says. "There's definitely value, and I think people will pay for use, but it's up to banks to ensure that this is positioned as value. Right now, the vast majority of the debit card fee burden is on retailers, but there's value to consumers, too."Krishna says he's "pretty sure there's a way to get consumers to pay for the convenience," but banks have to think creatively about how to position the value.

If banks do begin charging big fees for debit card use, consumers may well pull back on their debit card usage, and maybe even their spending.

That doesn't help banks or merchants. So it's back to the drawing board for both parties, with the end game a debit card fee everyone can live with -- even if it takes a year or two to get there.

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