Cats and dogs. Hatfields and McCoys. Whatever metaphor you want to use, banks and merchants are at it again over debit interchange fees. Experts say we probably won’t see a repeat of banks’ disastrous 2011 attempt to slap monthly usage fees on debit cards, but consumers could be stuck paying even more for products and services at big banks.
In 2011, the Federal Reserve implemented a roughly 24-cent cap per swipe over the protestations of both groups — banks wanted it higher, and retailers wanted it lower. (The cap consists of a 21-cent base cap, plus small, incremental increases based on the value of the purchase, which is why articles about it will use both 21 cents and 24 cents. No, nothing about this issue is simple.)
Last week, a federal judge upended the uneasy truce, declaring in a strongly worded opinion that the Fed was “inappropriately inflating” the amount banks were allowed to earn from debit swipe fees.
The Fed could appeal the decision, arguing for keeping the current cap. It hasn’t said whether or not it plans to do so, only that it’s reviewing the judge’s decision. The current cap will stay in place for now, so an appeal would mean status quo for a potentially long time.
If the Fed goes back and rewrites its rule, swipe fees will probably be lower, although how much lower is anybody’s guess. The retail industry says it only costs about four cents per swipe to process debit card transactions, and the Fed had initially floated a range of seven to 12 cents per swipe. Prior to the Fed’s 2011 rule, merchants paid around 44 cents per swipe.
If it sounds like these two giant industries are being a little petty dickering over a few cents here or there, it’s because debit swipe fees add up to serious money — $15.7 billion, according to the Fed. “Fee income has become more important,” bank industry analyst Bert Ely says. The reason: Regulators have reined in big moneymakers like overdraft and credit card fees, and banks are earning less on deposits because interest rates are so low.
If they lose a significant chunk of those billions in interchange revenue to retailers, banks will be looking to make it up somewhere else, says Nessa Feddis, senior vice president and deputy chief counsel at the American Bankers Association. “From a consumer’s perspecitve we will see even fewer banks offer free checking,” she says, and banks will implement higher fees and higher minimum balances to avoid monthly maintenance fees. “We did see an increase in monthly fees and higher balance requirements to avoid those fees” in 2011 when the cap was initially put in place, she says.
Feddis predicts that it’s “less likely” banks will try again to charge customers to use their debit cards. A Forbes article raises the possibility, though, that banks might start implementing per-transaction costs on debit card usage. “One impact of the ruling, if it stands, will likely be that some consumers start seeing… bank charges for using their cards,” it predicts.
Ely also disputes the retail industry’s suggestion that lower swipe fees could mean lower prices for consumers. “Any downward effect in swipe fees is going to have a miniscule cost effect on retailers,” he says. “Customers are not going to see that.”
Unsurprisingly, the retail industry begs to differ. “Retailers operate on extraordinarily small profit margins,” says Mallory Duncan, senior vice president and general counsel at the National Retail Federation. “Because it’s so competitive, when a retailer gets a little extra money… they take those pennies and they turn them into coupons or discounts on popular items.” Rather than dropping all prices by a small fraction, Duncan suggests that retailers might channel those savings into a handful staple items customers would be most likely to notice.
Duncan is dismissive of banks’ claim that lower swipe fees will mean more banks fees for customers. “Regardless of what the court does, the big banks will always look for excuses to try to raise fees,” he says.