When you swipe your debit card, your bank might charge a fee. No, this has not been implemented yet by all big banks, but is lurking right around the corner. All the banks are mulling over recovering some money that they are bound to lose with the cap on interchange fees that the Federal Reserve enforcedearlier this summer as part of last year’s Wall Street reform legislation.
However, if you use debit cards of Wells Fargo & Company (WFC) or JPMorgan Chase & Co. (JPM), you run a high risk of being charged as these two banks are already in test phases of charging their customers in certain regions.
On Tuesday, Wells Fargo said that, starting October 14, it will charge customers in Georgia, New Mexico, Nevada and Oregon a monthly fee of $3 for using a debit card.
JPMorgan has already imposed a $3 monthly fee on its debit cards and a $15 fee on its checking accounts earlier this year in some of its operating areas on a trial basis. The company has also stopped issuing debit rewards. The tests runs are still in progress.
JPMorgan has also contemplated a limit of $50 to $100 per transaction on customers’ debit card along with other major banks including Citigroup Inc. (C) and Bank of America Corporation (BAC). Moreover, BofA has already raised its ATM fee to $3.
Basically, these banks are in the pursuit of a recovery route from their lost debit card fees. Wells Fargo alone would salvage $200 million in losses from the debit card fee. However, if implemented nationwide, it would affect as many as 40 million customers of the company.
What Are Interchange Fees?
For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (V) and Mastercard Incorporated (MA). The charged amount is called interchange fees.
On average, banks charge a retailer 44 cents per transaction as interchange fee. Though the amount seems small, the extensive use of debit cards totals it to more than $15 billion for the industry every year.
Magnitude of the Cap
Earlier this summer, Federal Reserve implemented a cap on interchange fees for big banks at 21 cents per transaction. This represents a decrease of about 52% from the previous average, draining huge revenues from the industry.
Banks That are Let Off
Small banks with less than $10 billion in assets are exempt from the law. Nevertheless, these banks had willingly joined the larger banks in the lobbying battle on interchange fee cap. A general fear that the capping would hurt the profitability of the industry explains the support from small banks.
Debit Card Cap Battle
Following the Federal Reserve’s proposal to set a cap on interchange fees in December, the banking industry requested Congress to delay or reconsider the rule. This sounded off the battle cry.
Banks lobbied hard to convince Federal Reserve, but the rule was finally implemented with senators voting in favor.
Was This Intended?
The Federal Reserve’s proposal to slash interchange fee was primarily intended to resist banks from earning super normal profits. The noble intension was to trickle in the money thus saved into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.
However, banks are moaning that interchange fee cuts would reduce their financial ability to protect themselves against fraud as money from interchange fees helps to offset what they lose due to fraudulent transactions.
They are trying to shield themselves by capping transaction amounts not just to recover some lost money, but also to reduce the risk of bulk transactions. All said and done, the ultimate impact would still fall on consumers who genuinely depend on a debit card.
For consumers who fail to qualify for a credit card due to bad credit, the cap on debit card transactions will make daily transactions difficult. If they somehow manage to get a credit card, they will have to pay higher fees.
But a credit card always carries a fee. This leaves them with the costless alternative of carrying out transactions through cash. Then again, there are limits on daily ATM transactions. But now with these imminent ATM and debit card charges, will our own cash cost us, we wonder.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment