We're a fan of debit cards.
They're convenient, help us track our spending, offer rewards, and best of all, keep us out of debt because they limit our spending to what's in the bank.
Which is exactly why we're a little concerned that their free and rewarding usage is under attack.
A Little Thing Called The Durbin Amendment
Currently, banks charge retailers a fee every time you use your debit card (an interchange fee). The current average fee for a signature debit card transaction (when you use your debit card like a credit card) is $0.56 and the interchange fee for a PIN transaction is $0.23.
In less than a month, Congress is slated to implement the Durbin Amendment to the Dodd-Frank Wall Street Reform Act (which passed with bi-partisan support). This hotly-debated amendment would cap interchange fees for debit card usage to $0.12.
The intention of this bill was to invigorate the economy with savings to retailers, which would theoretically be passed down to the customer.
But banks will take a huge hit on revenue, about 70%, according to a spokesman for the American Bankers Association, and that loss will also get passed on to the customer. With big retailers on one side of the debate and big banks and credit card companies on the other, which side is for the consumer?
Many banks have already put big limits on free checking. Is the debit card system next?
Debit Card Reform: The End Of Free Banking?
With this reform, debit card use--and banking in general--will no longer be as free and simple as it used to be. Banks are already thinking of ways to make up for this impending revenue loss. Some major banks are considering imposing $50 or $100 caps on debit card charges (but whether this is a bluff at this stage, who knows). Others such as Chase are proposing new programs laden with fees--A.T.M. fees of $5, debit cards with $3 monthly fees, and checking accounts with $15 monthly fees. Many banks have already put big limits on free checking by imposing requirements like minimum balances or direct deposits. Is the debit system next?
Killing Off Debit Rewards
To make up for the financial hit that banks are taking because of this new legislation, many banks are also killing their debit rewards programs. Wells Fargo and SunTrust will soon put an end to theirs, and Chase will be killing its program on July 29th. Citi hasn’t made an official announcement either way, but it’s currently “evaluating potential changes” to its program, too.
Push To Credit Cards
Odysseas Papadimitriou, CEO of CardHub.com, believes the savings passed on from merchants by the Durbin Amendment will be short-lived. Long term, banks will increase fees associated with debit cards while decreasing their benefits, thus widening the gap between debit and credit cards. Consumers will be incentivized to use reward credit cards, whose interchange fees are currently unregulated (hint, Congress?).
What This Means For You
- Retailers are preparing to pass on their fee swipe savings to customers in the form of discounts and other benefits as soon as the reform goes into effect in July. But many consumers are skeptical about whether they'll truly see those savings. We'd still rather take free debit card banking.
- Evaluate whether switching over to credit makes sense for you. If you don’t already have a credit card, follow our checklist to open one. Remember that we recommend against opening up a store card or a new “professional” card. If you do go the credit route, keep spending as though it were debit. In other words: Never, ever spend more than you have, and always pay your monthly balances in full.
- But, know yourself. If you’ll have trouble controlling your spending with a credit card, keep your finger on the pulse of your bank’s debit card policies. One option is to turn to prepaid cards (read this for what you need to know about prepaid cards). Otherwise, use debit when it makes sense, and go with cash for the remainder.
- Consider banking with a smaller bank. Banks with assets of less than $10 billion are exempt from this law, which means they may still hold on to rewards programs and free debit card banking (though some are doubtful how long this exemption will last). Or consider online banking to avoid fees, suggests Credit-Land.com.
One note: small business owners might celebrate the passage of this act. They will no longer be plagued by high swipe fees, which have tripled since 2001.