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The new Debit Card Fee Cap instituted by the Fed, to go into effect in July 2011, applies only to banks with more than $10 billion in assets. That means that debit cards issued directly by Visa and MasterCard, as well as debit cards issued by small local banks or credit unions, along with prepaid debit cards, are not subject to interchange fee caps.
Even though the debit card fee cap applies only to bank-issued debit cards (even those bearing Visa or MasterCard logo), both Visa and MasterCard stocks plunged 10 % after the announcement.
That’s because Visa and MasterCard collect the Interchange fees and then pass that money on to the banks.
The new debit card fee cap could force Visa and MasterCard to renegotiate their arrangements with the U.S.’s largest banks, including Chase, Wells Fargo, Capital One, Citi and Bank of America. If they face strong-arm tactics from big banks, Visa and MasterCard may also opt to lower interchange fees collected for smaller banks and credit card unions, too.
So, although the law exempts the two credit card issuers from the debit card fee cap, it does affect them profoundly.
If these companies lose their debit card arrangements with major banks — the number one source of revenue for both MasterCard and Visa — they (just like the banks directly affected by the debit card fee cap) will be looking to make up the money in other ways.
In other words, legislation that was designed to stimulate the economy could actually mean an end to debit (and credit) card rewards programs, as well as the introduction of additional fees, higher ATM fees for debit card use, more (and higher) annual fees for debit cards, and more.
If you can imagine it, some debit card issuer will probably come up with a fee for it.
That’s why it remains important to read your bank statements carefully — especially keeping an eye out for unusual charges of small amounts that you might not otherwise notice.
“Debit Card Fee Cap Not Based in Reality”
According to this article at Bloomberg.com, the new fee cap — resulting in a 90% cut in interchange fees collected by merchants — was not actually set by assessing realistic costs of debit card transactions.
It does, however, put U.S. interchange fees more in line with those fees collected in other countries.
In the Bloomberg article, Visa spokesperson Will Valentine noted: “The Federal Reserve’s proposal includes artificial caps on debit interchange that do not realistically reflect the value of card acceptance and do not reflect the actual costs of running a secure, reliable and efficient debit network.”
In fact, a large part of running a debit card network involves security to protect customers against identity theft and fraudulent charges, as well as insurance to cover these circumstances.
It’s not likely, but there’s even a slim possibility that some banks will simply stop issuing debit cards, or at least stop making them available for in-store transactions. (Yes, the next generation may not have to convince their children that money doesn’t really come out of a hole in the wall!)
What does the debit card fee cap really mean to customers?
Some time this summer, you might consider dropping your big bank debit rewards card issued by a company like Chase, Citi, or Capital One, and switching to a credit union or local bank. You might even considering using a prepaid debit card and closing your checking account all together. After all, in today’s economy, plenty of other money management and bill paying methods exist include:
- Online-only savings and/or checking accounts
- Paypal accounts used in conjunction with a Paypal debit card
- Pre-paid debit cards
- Credit unions and local banks
- Cash payments whenever possible
It’s interesting that, as technology progresses to the point where it’s nearly possible to create a cash-less (and, in fact, a paper-less) society, people may decide it’s just easier and more convenient to pay for brick-and-mortar transaction with plain old paper money.