Debit Cards Under Attack? What You Need To Know

Allison Kade
Posted

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.

TELL US: How will these proposed changes affect you and your card use or business?

  • Nicole Prelle

    Will this affect credit unions as well. Such as Schoolfirst federal credit union?

    • kelseyb8632

      It does affect credit unions. There is supposed to be a “carve out” for financial institutions with assets less than $10 billion (which is the majority of credit unions), but many experts including Ben Bernanke, the FDIC chairperson, the NCUA Chairperson, and many other organizations have all said that the carve out is unlikely to work. If the carve out doesn’t work, many credit unions will have to cut debit card rewards, or begin charging for checking accounts.

      Another big issue is fraud protection. Interchange income helps pay for the fraud protection we have on our debit cards. With this cap on interchange, retailers would be able to choose the network they want to process their debit card transactions through. Major retailers may have the resources to create their own networks with less fraud protection. This puts the consumer at increased financial risk.

      You can learn more by looking here: http://cuna.org/initiatives/interchange

  • Nicole Prelle

    Will this affect credit unions as well. Such as Schoolfirst federal credit union?

  • Nicole Prelle

    Will this affect credit unions as well. Such as Schoolfirst federal credit union?

  • TC

    I’ve already left Chase because of monthly checking account fees. I currently use a student checking account that I’ve had with Bank of America for a few years that’s free and I will continue to use it as long as it remains so. I know $12 each month isn’t much for some people but I work freelance so my money is very uncertain and I try to keep my month to month expenses below a certain amount.

  • TC

    I’ve already left Chase because of monthly checking account fees. I currently use a student checking account that I’ve had with Bank of America for a few years that’s free and I will continue to use it as long as it remains so. I know $12 each month isn’t much for some people but I work freelance so my money is very uncertain and I try to keep my month to month expenses below a certain amount.

  • TC

    I’ve already left Chase because of monthly checking account fees. I currently use a student checking account that I’ve had with Bank of America for a few years that’s free and I will continue to use it as long as it remains so. I know $12 each month isn’t much for some people but I work freelance so my money is very uncertain and I try to keep my month to month expenses below a certain amount.

  • Molly

    I wish Congress would stay out of things. They’re always passing some law, and banks just find other ways to charge.

    • http://www.smartmouthblog.com Nicole Longstreath

      Congress isn’t perfect – but it’s not the problem here.

      http://www.smartmouthblog.com

      • Molly

        Congress doesn’t seem to appreciate that banks will always find new ways to make that money back. Perhaps it isn’t the problem, but it’s not exactly the solution, either. But I’m curious — who or what do you think is the problem? “American companies,” meaning … retailers? Or big banks?

        BTW, I agree with you about paying with cash. I use cash for most variable expenses, and for me the benefits far outweigh any rewards credit or debit card.

        • http://www.smartmouthblog.com Nicole Longstreath

          I think the problem is primarily with banks and other large corporations which are only interested in profits at any cost. But, actually, I do agree that Congress is part of the problem – usually because they are in their pockets.

          You’ve inspired me to seriously consider going all-cash, regardless of what the outcome may be with the laws regarding debit cards.

  • Molly

    I wish Congress would stay out of things. They’re always passing some law, and banks just find other ways to charge.

  • Molly

    I wish Congress would stay out of things. They’re always passing some law, and banks just find other ways to charge.

  • Llodwick

    I’m 60 years old. My mom was the “financial analyst” in the family. Every Saturday, she would sit down and pay the bills that were due two weeks out (she would have had an excellent FICO score). My dad did not trust banks (as the banks and the stock market failed during my grandfather’s lifetime), so Mom got CASH from Dad and paid the bills with money orders. Nuff said.

  • SA

    I only use my debit cards because I am a student and it is easier to manage. Since I do not have a full time job, the uncertainty attached to credit cards with their limits and interest does not appeal to me one bit. Credit cards are what destroy this country. People keep buying on credit or taking out loans and that is how they end up in debt. I never spend more than I have and always keep a reserve amount in my account in case of emergencies. Maybe we should be getting rid of those horrible credit cards instead. If we all lived by spending what we have, life would be easier and people would realize what they can really spend without going in the red. This would breed more responsible and savvy spenders. For those who are barely getting by with what is actually in their account, it would draw attention to our country’s economic problems rather than pouring spackle over them and pretending they don’t exist because credit cards let us believe we have more to spend than we actually do.

    • TC

      I agree! Somehow my bank thinks it’s perfectly reasonable to slap a 20.99% APR rate on my credit card

  • Maddie

    I’m definately curious to know if it affects Credit Unions. That’s where I have my debit card, and frankly, I’ve never used a bank.

    • kelseyb8632

      It does affect credit unions. There is supposed to be a “carve out” for financial institutions with assets less than $10 billion (which is the majority of credit unions), but many experts including Ben Bernanke, the FDIC chairperson, the NCUA Chairperson, and many other organizations have all said that the carve out is unlikely to work. If the carve out doesn’t work, many credit unions will have to cut debit card rewards, or begin charging for checking accounts.

      Another big issue is fraud protection. Interchange income helps pay for the fraud protection we have on our debit cards. With this cap on interchange, retailers would be able to choose the network they want to process their debit card transactions through. Major retailers may have the resources to create their own networks with less fraud protection. This puts the consumer at increased financial risk.

      You can learn more by looking here: http://cuna.org/initiatives/interchange/

  • http://www.smartmouthblog.com Nicole Longstreath

    It’s such a shame that American companies just conspire to fleece the people blind. Looks like we’re all just going to have to start carrying cash again – the way they did 30 years ago. That, in fact, may be a good thing anyway because we will probably be more likely to hold onto that cash instead of swiping a card.

    http://www.smartmouthblog.com

  • Hotrodmamaq_69

    So many places either don’t accept cash or bauk at it and 15 dollars or more to pay some bills over the phone.

  • pixie

    I quit using my debit card when I started putting money into my linked savings account because I thought it would be too easy for someone to wipe out my savings if one bad apple got hold of my debit card info. I use my AmEx card for all of my bills and use cash for my weekly small purchases (coffee, lunch). I make sure that I budget myself to taking only a certain amount out of the ATM each monday and that has to last for the week. This system works for me but I have to stay disciplined and pay off the card to keep the balance low or at zero as well as no interest charges.

    I also pay towards my AmEx every Friday on payday so that it’s easier ot pay the full balance of bills (cable, cell, electric) rather than a big chunk once a month or carrying over a balace from month to month.

    • Oranged

      I like how you roll! I am pretty good at this sort of thing but I want more structure Mind if I adopt this habit as well? ^_^

  • http://getliquid.com Max Jaffe

    Great suggestion to use a credit card instead of a debit card if the bank starts charging a fee for the use of a debit card or limits your purchases. As you said, if you start using a credit card, make sure you pay the balance in full by not putting charges on the credit card for which you don’t have the money. That way, you can play the float by making use of your money until it’s due to the credit card company. Even with today’s non-existant interest rates, float doesn’t make much sense, but who doesn’t want to hold on to their money as long as possible? WIth a debit card, the money goes out of your account immediately.

  • Zei1115

    This is what happens when government gets involved. Actions like this just trigger the flow of over doing it with law after law after law…

  • Lolagilligan

    I immediately switched from debit to credit card when my bank eliminated its debit rewards program. Now I treat my credit card (with a liberal rewards program) just like my debit card — I record each purchase in my checkbook and deduct it immediately from my balance so I know exactly how much money I actually have. I swipe the entry with a yellow highlighter to remind myself that’s it’s owed and then reswipe it with a purple highlighter when I pay my credit card bill (in full) each month. So far, no problems. (As I’m also somewhat hardcore, I always round up to the next dollar when recording purchases and never enter credits to my account. It gives me lots of leg room for unexpected expenses.)

  • Michelina00

    I am no conspiracy theorist, but I do think it’s true that large financial institutions are in the business of making money any way they can. So, maybe Congress is closing a door– but these companies will find a way to open a window. Unfortunately, they do not really care about the economy at large, let alone average Americans’ financial health.

  • Joleenloretta

    we have all gotten use out of our debit cards, they do help not only the person doing the shopping, but the merchant in needs of keeping large sums of cash safely and having less loss simply by random errors in making change. I for one would not want to return to shopping with my wallet filled with the cash I need for groceries once a month, nor do I want to use checks and the problems with their value. I also do not use credit cards as I know myself and impluse purchases all to well. this concept is another method to lower the level of money available for the average businessman/woman and the smaller consumer.

  • Guest

    This is all very interesting, but I’m curious about how this will affect those of us who run our debit cards as credit? Truthfully, I’m not really sure how that all works in the first place.

    • kelseyb8632

      Choosing debit or credit determines how the transaction is processed behind the scenes. Interchange is made on “credit” transactions. But most checking accounts put restrictions on the number of debit/PIN based transactions you can do per month. The financial institutions would like you to run your debit card as credit, this is why a lot of them offer rewards only when you swipe and sign.

  • Insurancechick

    We’ve gone to budgeting to the penny and are using cash for Food, Clothing, Cosmetics (hair & nails & such), & Household items. If fees are instituted, we’ll use cash for more of our budgeted items, even if it means walking inside to pay cash for gas in the middle of a Wisconsin winter!

  • Oranged

    What about Credit Unions? I don’t know too much about them, but I was told that they are different than a bank and they don’t charge you all of the fees that a Bank does. Will they be affected by any of this and would it be good to switch to them in the event that our own banks make these changes, which I am sure will cause a lot of account closures?

    • kelseyb8632

      It does affect credit unions. There is supposed to be a “carve out” for financial institutions with assets less than $10 billion (which is the majority of credit unions), but many experts including Ben Bernanke, the FDIC chairperson, the NCUA Chairperson, and many other organizations have all said that the carve out is unlikely to work. If the carve out doesn’t work, many credit unions will have to cut debit card rewards, or begin charging for checking accounts.

      Right now, credit unions and other financial institutions are fighting for Congress to delay the ruling so that the effects of the cap can be studied. It’ll be interesting to see if the carve out works (I personally don’t think it will).

      • Oranged

        Aha, I understand now. Thank you for the info!! ^_^

  • Amy.Lanta

    This is a great article and wonderful discussion! As a professional in the merchant services industry we are watching the news on this amendment daily. As it stands right now, *probably* nothing will happen until July. But it’s a VERY hot topic, and the fact that it was proposed and adopted without public hearing kept it out of the publics eye for as long as possible. You can imagine that the only merchants that will *really* benefit from this are big box retailers … This is NOT about the amount of money banks make … this is about BIG BOX RETAILERS and their silent lobbyists who INTENTIONALLY left this out of the public opinion because clearly, they are the only ones who stand to gain!! It’ll certainly be interesting to see how this plays out!!

  • Money

    Instead of getting a credit card why wouldn’t consumer just continue to use their debit card as a credit card? Seems like it would solve the issue for the consumer. What about just using cash?

  • Oranged

    I didn’t want to get a credit card at all, at least not until I actually needed it, but if its the best way to get through all of what’s going to happen I can get on board with using it as if it were my debit card. I would much rather do that than waste money every month. Instead of paying someone, I could save $15 a month to buy something that I need or want. I refuse to pay every month just for a checking account. My mom just recently closed her Chase account because they started charging her $15 a month. She was saving money in there and instead of it accumulating, it felt as though she was saving money just to pay them with.

    Pardon me for not knowing, but what is a Big box retailer? As a person who wants to start a business soon, is this a term I should be familiar with? Just curious

    ^_^

    • Llodwick

      A Big Box Retailer is like Walmart and Target that sell groceries as well as clothing, etc., as well as stores such as Best Buy. Costco is not a big box retailer because it makes you buy in large quantities.

  • Karenaltemose

    I usually like the articles on this site. However, this is PA ONE SIDED PR CAMPAIGN to spread negativity towards a fantastic bill that WILL HELP SO MANY! People should look up the bill and read a real summary of all the good it’s going to do! The less fantastic part is that the big banks will lose a little… BUT THE CONSUMER WILL GAIN! A centralized watchdog over big banks.. WAHOO! Worth the loss in rewards! Just find a small bank people!

    • Molly

      These new laws always trumpet how much the consumer will save, but it doesn’t ever seem to work that way, because the banks will always find new ways to make money.

      Case in point: the CARD Act banned some overdraft fees and late charges, but banks just raised existing fees and created new ones for things like: not doing your banking online, not having a high enough balance, not having multiple accounts at the bank, using your savings as overdraft protection, and opening a line of credit. (And you could argue that extra fees on teller banking, low balances, and only having one account are an added burden on low-income consumers.)

      So yeah, I guess I’m not optimistic about the Durbin Amendment. I hope it saves people money, but I can’t see why the banks would just roll over and lose $9 billion a year. And if the banks decide to recoup that money, the consumer doesn’t gain…at best, it’s a zero-sum game.

      Sources: http://money.cnn.com/2010/09/24/pf/new_bank_fees/index.htm)
      http://blogs.forbes.com/greatspeculations/2010/12/17/how-badly-the-durbin-amendment-might-whack-jp-morgan-bank-of-america/

    • agraham

      Loss of rewards is one thing but if banks start adding monthly charges for debit cards or more account fees how is this great for the consumer? A “watchdog” sounds like a great idea but how do we know they just won’t put former bank execs in charge. It’s happened in other industries.

    • agraham

      Loss of rewards is one thing but if banks start adding monthly charges for debit cards or more account fees how is this great for the consumer? A “watchdog” sounds like a great idea but how do we know they just won’t put former bank execs in charge. It’s happened in other industries.

    • agraham

      Loss of rewards is one thing but if banks start adding monthly charges for debit cards or more account fees how is this great for the consumer? A “watchdog” sounds like a great idea but how do we know they just won’t put former bank execs in charge. It’s happened in other industries.

    • agraham

      Loss of rewards is one thing but if banks start adding monthly charges for debit cards or more account fees how is this great for the consumer? A “watchdog” sounds like a great idea but how do we know they just won’t put former bank execs in charge. It’s happened in other industries.

    • agraham

      Loss of rewards is one thing but if banks start adding monthly charges for debit cards or more account fees how is this great for the consumer? A “watchdog” sounds like a great idea but how do we know they just won’t put former bank execs in charge. It’s happened in other industries.

  • Periwinkle

    I do have a Question..I just saw a few days ago That My Bank added OverDraft Protection..I never requested it..Is this Legal?

  • Periwinkle

    I do have a Question..I just saw a few days ago That My Bank added OverDraft Protection..I never requested it..Is this Legal?