Debit card fees: Will shoppers benefit from new cap?

Debit card fees paid by retailers to banks could plummet next month after the Senate failed to pass a delay Wednesday. Retailers are happy, but that might not help consumers.

Elaine Thompson/AP Photo/File
In this Nov. 2, 2009, file photo, a customer swipes a MasterCard debit card through a machine while checking out at a shop in Seattle. A new regulation, set to go into effect July 21, could limit debit card fees to 12 cents per transaction, down from an average of 44 cents per transaction.

A bid to delay a cap on the fees that banks charge merchants when shoppers pay with their debit cards failed Wednesday. It’s a win for retailers, who say the fee cap will allow them to pass savings onto consumers, but experts say shoppers are unlikely to see lowered prices at the checkout line.

A bill before the US Senate Wednesday sought to delay regulations for up to a year that would cap debit-card swipe fees at 12 cents per transaction. Banks currently charge retailers a 1 to 2 percent fee for each transaction, which gets banks an average of 44 cents per transaction and an estimated $16 billion annually.

The bill proposed by Sen. Jon Tester (D) of Montana actually won a majority of votes, 54 to 45, but fell six votes shy of the 60 needed to avoid a filibuster.

The new regulations are set to take effect on July 21 and stem from last year’s financial reform bill, which instructed the Federal Reserve to place such a cap. Reports suggest banks will appeal to the Federal Reserve to amend the fee cap.

Studies have concluded that higher swipe fees tend to benefit card users and penalize people who pay with cash. That’s because businesses cannot charge customers more for using a card, so they compensate by charging all customers slightly higher prices.

Debit cards users might benefit from rewards points, while those who pay with cash get no extra benefit from the higher price at the register.

In fact, some portion of the swipe fees goes toward banks paying for rewards benefits. A 2010 study by the Federal Reserve Bank of Boston found the average cash buyer pays an extra $129 per year to pay for the $1,133 in rewards and other benefits the average card user enjoys.

In March, 170 small business owners gathered in Washington to plead their cases, saying they would pass the savings from a swipe-fee cap onto customers.

To some, that seems unlikely. “I find it hard to believe that retailers will take that 99 cent item and change the price to 98 cents,” says Bill Hardekopf, CEO of

He adds that banks are also unlikely to accept the loss of revenue without making up for it in other areas. “The retailers are the big winners. The banks are the big losers. And who knows about consumers. I think consumers are going to lose too,” he says.

Ahead of Wednesday’s vote, banks warned lawmakers they may be forced to eliminate free checking, cut rewards programs, or increase customer fees if a swipe-fee cap took effect.

The upcoming swipe-fee cap will apply only to debit cards, not credit cards. Mr. Hardekopf speculates after the swipe-fee cap takes effect, merchants will start encouraging debit-card use, because those transactions will be inexpensive to process.

“I think the clerk is going to be trained to say, ‘Would you like to use your debit card for that transaction?’” says Hardekopf.

He says banks will likely try to incentivize people to use credit cards, via better rewards, because there will be no cap on credit-card swipe fees.

Some financial institutions are rethinking their business strategies to adapt to the July 21 swipe-fee cap.

Regions Financial, Alabama’s largest bank, announced Wednesday it was purchasing the $1 billion credit card portfolio from FIA Card Services as a way to beef up its credit-card presence. Bank executive David Turner told investors at a conference in New York the cap could cut up to 75 percent of its swipe fee revenue, and the company would have to reconsider even offering debit cards, reported Bloomberg.

The Fed has not officially released its swipe fee regulations but is expected to by the end of this month.

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