Banks Lose $16 Billion in Swipe Fees


bank feesThere were no winners when, this month, The Federal Reserve announced its concluding regulations that will cap debit card swipe fees charged retailers at 21-cents per transaction. Financial institutions argue that they stand to lose approximately $16 billion per year in revenue collected from merchants, while merchants criticize that the 21-cent cap does little to alleviate their debt burden to the banks and lenders. With neither side celebrating the passage of this regulation, it is difficult to see who exactly benefits or what effect this regulation will have on consumers.

The lending industry currently claims an average debit card swipe fee of 44-cents, thus, imposing a 21-cent cap would greatly diminish their profits. But as every lawyer and financial expert knows, it’s all in how you crunch the numbers.

The 44-cent average swipe fee is actually a composite of two numbers: fees charged on credit card purchases (exempt from these regulations), averaging 56-cents, and fees charged on debit card purchases, averaging 23-cents. With conditions in place that will sometimes allow the 21-cent fee to be raised as high as 24-cents, retailers argue these new laws are essentially pointless.

Lawmakers had originally been proposing a 12-cent cap on debit swipe fees, and while this would have been a much better resolution for retailers, the banks claimed the profit loss would be great enough as to practically make it unprofitable to maintain debit card purchasing as-is. The compromise was to set the cap at 21-cents, plus 5 basis points on the amount of the transaction for fraud costs, plus 1 cent for fraud prevention costs.

Also, financial institutions with $10 billion or less in assets, governmental benefit cards, and certain prepaid cards are exempt from the new law.  There are fears on the part of all credit lenders, exempt from the new regulation or not, that merchants will begin steering customers away from using their debit cards by offering special deals to those who pay with cash or credit, thus furthering their loss.

The results of these new regulations for the consumer will most likely be slow and subtle. Over time, the financial institutions may look for ways to regain whatever monies are lost. A loss of income is rarely just accepted. Higher ATM fees, tighter restrictions, or simply doing away with free checking are all possibilities, as is the implementation of a debit card swipe fee passed directly to the consumer. Simply upon hearing of impending debit card swipe fee reductions, major lenders such as Wells Fargo, Chase, and SunTrust either eliminated, or greatly curtailed, their rewards programs.

As there is little a consumer can do, caught in middle of this power play between the banks and merchants, it could actually work out to the consumer’s advantage. Should retailers offer discounts to those willing to pay with cash or credit, the consumer will profit from this, much to the chagrin of the banks. However, the banks may decide to make up their losses in other ways, so keep an eye on your interest rates and rewards programs to see if they start to fluctuate.

According to a recent poll taken before the Senate vote, the U.S. News & World Report noted that two-thirds of those polled were against a delay in implementing the new swipe fee limits and would view their Senators less favorably❠if they voted to approve the delay. Why consumer opinion would come down on the side of the retailers over the side of the banks, may have more to do with politics than the bill’s ramifications for the consumer. Since the $700 billion bailout for banks in 2008, these financial institutions have not received much sympathy from the American people.

While the banks and retailers hammer out a compromise, be on the lookout for credit card specific sales. As well, be cautious for increased prices on goods as this law goes into effect this coming October.

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Written by MichaelG

Michael German is an expert in the field of personal finance and a graduate of Columbia University. His lengthy tenure includes literary work with The New York Times international weekly edition, where he contribute reports on global economy and consumer trends. As a writer and researcher in personal finance, Michael is also a contributor to The Manhattan Daily, Everything Finance Blog, and many other online and print publications.

MichaelG

Michael German is an expert in the field of personal finance and a graduate of Columbia University. His lengthy tenure includes literary work with The New York Times international weekly edition, where he contribute reports on global economy and consumer trends. As a writer and researcher in personal finance, Michael is also a contributor to The Manhattan Daily, Everything Finance Blog, and many other online and print publications.

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