Reducing Swipe Fees Could Cripple Smaller Banks

Hold on to your pocket books, because the Federal Reserve is about to rob you.

If the new addition to the Dodd-Frank financial reform bill, called the Durbin amendment, passes on April 21^st, consumers can say ‘hello’ to high loan interest rates, and increased ATM and debit fees, and can say ‘goodbye’ to free checking.

The amendment focuses on consumer interchange fees, also known as swipe fees. Interchange fees are described as fees collected from merchant banks which are paid to the customer’s bank; this is based on the use of major credit card suppliers, like MasterCard, Visa, Discover, and American Express.

If passed by the Federal Reserve, this new legislation will have many implications for debit card users. A survey by the National Association of Federal Credit Unions found that almost half of customer banks surveyed are considering removing free checking on debit cards to make up for the lost fees. It also found that banks are considering eliminating or cutting back on rewards programs, and almost 9% revealed that they might have to lay off staff members.

“Consumers will pay more to own and use a debit card. Depending on their card issuer, some may charge annual fees, others remove free checking accounts or rewards, and others may charge per transaction. Still other debit card issuers will look to limit their exposure to fraud, since they won’t be able to cover that cost with the price cap by limiting either the number of transactions or the limit on the transaction amount with your debit card. Either way, the face of debit as we know it today will change if this rule is enacted,” Trish Wexler spokeswoman for Electronics Payment Coalition.

Customer banks use interchange fees to make the banking experience better for the consumer. The money acquired from these fees go towards handling expenses such as ATM withdrawal, fraud protection and free checking accounts. The Federal Reserve is attempting to cap customer bank interchange fees at 12 cents, which is down almost 80% from current levels.The new change, which is causing a stir in the banking industry, is likely to hurt small banks and credit unions as well.Without that money, banks will be forced to increase fees on checking accounts, make fewer loans and raise interest rates higher than they already are.

Merchant exchange fees vary for a variety of reasons. Larger banks pay lower fees, debit cards require lower fees, and credit cards require high fees. Premium reward credit cards require the highest fees; sometimes double the amount of debit card swipe fees. But the new legislation doesn’t target credit cards, only debit cards. This makes using the bank as a place to stash money a less desirable option for cash holders.

Market analysts at www.Credit-Land.com are forecasting a monopolizing effect this legislation might have on the banking industry. Because bigger banks are easily able to cope with these new regulations, smaller banks and credit unions could soon become obsolete.Interchange fees are essential for credit unions, which are far smaller than even the smallest bank. Credit unions can’t simply absorb the costs and still keep their customers happy like the larger banks can. Credit unions usually charge lower interest rates, late penalties, and annual fees compared to other banks.

Larger banks are constantly hiring, dishing out bonuses, and make large profits on almost all of their customers. Reducing interchange fees on debit cards, which make up 20% of non-interest revenue for credit unions, would have a negative effect on smaller banks. It would ultimately force layoffs and job suspensions in an already bleak economy.

“I cannot think of anything positive (with this legislation). This was sloppy legislation, passed in the dark of night, with no hearings, studies or review to determine the impact on consumers or small financial institutions,” Wexler said. She continues, “Congress needs to step in at this point to stop the rule, study the implications of the rule, and then offer a solution to ensure that consumers and small financial institutions will not be harmed.”