The issue of revenue that banks and credit unions make from transactions on their debit cards moved from the obscure corners of the financial services industry into the national spotlight last week as the Federal Reserve's debit interchange cap came into effect.
The cap, which reduced debit card interchange for large card issuers from an average of 44 cents per transaction to an average of 24 cents, became operational Oct. 1.
At first the cap's advent seemed destined to be a side issue suitable to the financial services industry trade press. But the decision by Bank of America to start charging cardholders a $5 per month fee for the use of their debit cards catapulted it out of the wonky laps of economists and lawyers and onto the national stage.
President Barack Obama brought it up as an example of something that would have been harder to do if the Consumer Financial Protection Bureau had been up and running. In an interview with ABC News, Obama said the fee “is exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening” and contended that the CFPB is the type of strong watchdog agency the U.S. needs to crack down on cases like this.
The bank largely refrained from commenting on the fee, but media outlets reported from its website and letters to accountholders that the fee will not be levied if the consumer uses his or her card at an ATM and that even one use of the debit card at a point-of-sale terminal would be enough to trigger the fee.
On some accounts that already carry fees for not having minimum monthly balances of at least $1,500, the addition of the debit card fee will increase monthly fees to between $17 and $20.
Media outlets also reported consumers saying they would either change financial institutions or change the way they pay for things, including going back to using cash and checks, because of the fee.
Other banks remained largely quiet about the fees they started to charge, but a wide variety of newspapers in the country editorialized against it as an example of what happens when banks are deprived from income in one area. They begin to make it up somewhere else.
“Durbin assumes the retailers will pass the savings onto the consumer,” editorialized the conservative-leaning Washington Times on Oct. 1. “There is no indication they will. The retailers could very well just add the money to their bottom line. Home Depot estimates they could see a $35 million benefit from this piece of legislation."
And hard data began to come in, too. Heartland Payment Systems, the merchant processing firm, announced that between Oct. 1 and Oct. 3, the firm paid out over $1.7 million in Durbin savings to its retail clients. More than $671,000, the firm said, went to restaurant retailers.
"These savings are just the tip of the iceberg," said Bob Baldwin, president at Heartland. "Durbin dollars should stay where they belong–in merchants' bank accounts–and Heartland is helping business owners keep more of their hard-earned cash. Merchants shouldn't take this for granted. They need to be vigilant in ensuring they receive the cost savings they deserve so they don't unknowingly fall victim to processors looking to profit at their expense."
For his part, Sen. Richard Durbin (D-Ill.) fought back against his critics, taking to the Senate floor to denounce Bank of America and other larger banks for imposing the fees. In particular, Durbin alleged that far from taking a loss from the interchange cap, the $5 fee will let the bank make money.
Durbin said he wrote a letter to Bank of America CEO Brian Moynihan that included Durbin’s calculations on the bank’s losses from the interchange cap.
“Guess what? If you do the calculation, the $5 a month on the number of reported debit cardholders of Bank of America, this will bring back twice as much as their projected loss on this new law,” he concluded.
On a Oct. 4 press call, Durbin argued that reaction to his amendment capping debit card interchange represents an opportunity for credit unions and community banks.
And in a letter to the Illinois Credit Union League, Illinois Bankers Association and Community Bankers Association of Illinois, Durbin argued that the increase in fees from larger banks gives them a strong competitive advantage.
“Now is the moment for smaller banks and credit unions to make crystal clear to these consumers the superior benefits and customer service that your institutions provide compared to the Wall Street giants. I strongly urge your institutions to seize this competitive opportunity, as this will serve both consumers' best interests and your own.”
Durbin also noted that both Visa and MasterCard have issued interchange schedules that, he said, should eliminate the fear that the cap will hurt the income of smaller financial institutions.
He referenced a letter from 10 retail associations, including the National Retail Federation, that declared that retailers would not discriminate against cards from credit unions or community banks because of their higher interchange.
“Currently, merchants are subject to Visa and MasterCard network rules that require us to accept all Visa and/or MasterCard debit, regardless of which bank or credit union issues the card,” the merchants wrote to Durbin in the May 2 letter.
“This is called the honor all cards rule, and we risk the threat of $5,000 per day fines–or higher–if we break this rule, so we assure you that merchants have no intention of violating this term of brand acceptance. These rules also prevent merchants from pricing goods differently based upon the financial institution that issued the card.”