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Thomas Jefferson once said, “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”
So that’s not exactly what’s happening with the new debit card fee cap (although it describes the mortgage crisis pretty well), but it does remind us that the Federal Reserve (the Fed) is actually a group of high-level bankers.
Why, then, would they enact a law capping debit card interchange fees, which could ultimately cost banks anywhere from $13 billion to $20 billion annually (depending on which statistics you read.) That’s easy: They knew they’d make up the money somewhere else.
Think back about two decades ago. People stood in line at the grocery store and… wrote checks for their purchases. If you needed cash, you went home and dug it out of your piggy bank (or your mattress or wherever you stowed extra cash) or went to the bank and wrote a withdrawal slip for the teller.
And then money started coming out of a hole in the wall… We had PIN numbers to remember. The less-than-financially-savvy people set the numbers as their date of birth, or their kid’s date of birth, and then wrote the number down in their wallet, storing it right next to their debit card.
Smarter people chose more cryptic number combinations and committed them to memory. The debit card became the new currency.
Then stores started accepting debit cards for transactions. Now (and this started about 10 years ago) when someone pulled out their checkbook at the grocery store, everyone in line behind them groaned. It was all swipe-and-go.
You might even remember that commercial where a customer halts an entire coffee shop line by pulling out (gasp) cash, instead of swiping their debit card for a purchase.
More recently, in direct response to the credit card crunch, banks started offering greater incentives for people to use their debit cards for store and online transactions. (Public embarrassment for using cash or a check wasn’t enough.) Banks were earning up to 44 cents, plus a percentage, of each transaction thanks to interchange fees, collected by Visa and MasterCard and paid to the banks.
Debit rewards cards were born to encourage today’s “swipe-and-go” mentality.
Debit rewards card competition got steep, in a similar way that top-tier credit cards compete to offer the best rewards programs to choice customers. Some had no annual fees, and rewards as high as 5% on in-store purchases and 10 or 15X bonus points on purchases made through that card’s shopping portal.
The Chase Ultimate Rewards debit card program, which carries an annual fee of $25, is one of the best debit reward programs available today, and the Citi ThankYou debit card isn’t bad, either.
But, with the introduction of the Durbin amendment, which permitted the Fed to cap debit card fees — and the Fed’s subsequent cap of 12 cents per transaction on debit card fees, to go into effect in July 2011 — we may simply see an end to debit cards rewards programs, especially cash back rewards programs.
In fact, most financial experts take this to be a certainty. After all, banks are losing a lot of money with the debit card fee cap, and they have to make it up somewhere. Also, there’s very little incentive for banks to encourage customers to use debit cards anymore.
We can only hope the end to cash back debit cards is the only way banks will try to make up the lost revenue. But it’s quite possible we’ll start seeing more annual fees, non-use fees, higher ATM transaction fees, an end to free checking accounts and several other perks we’ve enjoyed from banks competing for our business in the past decade.
Keep in mind, the debit card interchange fee cap does not apply to debit cards issued by banks with less than $10 billion in annual revenue or credit unions. If big banks start charging additional fees or even limit customers’ debit card “privileges,” at least customers will have some recourse: Seek out local banks and credit unions for better customer service and fewer fees.