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A recent Senate vote all but confirmed that the Durbin Amendment would be implemented as planned. As the Federal Reserve scrambles to issue final regulations on interchange fees and debit card issuers scramble to comply, banks look for creative ways to make up for the loss of an estimated $14 billion in revenue.
Many banks have already adapted to less lucrative checking accounts and changed their fee structures accordingly. Still others are focusing on long-term reactions to interchange regulation, from court challenges to innovative revenue models. Here are five ways we’ve seen banks try to compensate for a 12-cent interchange fee limit:
1. Sue the Fed
TCF Financial, a relatively small Minnesota-based bank, sued the Federal Reserve in October over the constitutionality of the 12-cent fee cap. Their argument rested on three points:
- The Durbin Amendment exempts banks with less than $10 billion in assets, so the restrictions apply to only 1 percent of banks.
- The 12-cent limit, down from an average per-transaction fee of 44 cents, is not “reasonable and proportional.”
- TCF has a reasonable claim to interchange revenue, so the cap violates the Fourth Amendment’s protection against unreasonable search and seizure.
TCF’s challenge is now working its way through the federal appellate courts. In an initial ruling, District Judge Lawrence Piersol believed that TCF’s argument was substantial enough not to throw out the case, but that it did not merit a stay of the proposed regulation. Banks’ lawyers are kept at the ready, poised to mount a court challenge as soon as the Fed issues its final regulations.
2. Carrots for Credit Card Users
Credit cards escaped regulation by the Durbin Amendment, even though they commanded higher swipe fees even before the cap. Banks are doing their best to nudge their customers toward credit instead of debit, enticing them with rewards credit cards that have better-than-usual rewards rates. They also stepped up their marketing campaigns (the Capital One Venture drafted Alec Baldwin) and rolled out short-term promotions on the order of 100,000 miles for signing up, a $1,000 value.
3. Sticks for Debit Card Users
Complementing the pull toward credit cards is a push away from debit. Many banks canceled their rewards checking accounts–Chase made a point of blaming the Durbin Amendment–or instituted new fees.
What’s more, Bank of America, Chase and others threatened to implement a $50 or $100 limit per transaction on all debit cards, rendering them useless for many dining, retail and even grocery purchases. The reasoning, according to the banks, is that 12 cents won’t cover fraud protection, so they need to limit their vulnerability. In effect, though, it’s a powerful disincentive to use debit cards.
4. Change Checking Account Fee Structures
Debit card issuers also changed how they monetize debit cards, from interchange fees to the accounts themselves. Instead of earning more with greater transaction volume, they see greater profits when more accounts are opened and when more fees are incurred.
Accordingly, any number of new fees have cropped up. Monthly maintenance fees, waived if customers maintain a minimum balance, replaced many previously free checking accounts. New checking account customers are offered overdraft protection, at $35 per usage, and many accept even though they often don’t understand the true cost. Other fees include paper statements, live assistance and not having multiple accounts with the bank.
These new fees disproportionately affect the poor, who are often unable to make minimum balance requirements. “Banks cannot put a sign in the window that says ‘We will give better service and charge lower fees to rich people.’ They can’t do that. So they tier their products, their pricing to have the same effect,” says industry consultant Ken Thomas.
For the under-banked, who often turn to prepaid debit cards, check cashing or pawn shops, the fees are just one more reason to avoid opening a checking account. Lower-income people are less lucrative for banks, since they don’t have as many transactions and deposit less money. “[Banks are] basically shedding themselves of accounts that they can’t make any money at,” says economist Mike Moebs.
5. Cash in on the Prepaid Debit Loophole
The Durbin Amendment contained two exemptions from the swipe fee cap: Institutions with less than $10 billion in assets, and many prepaid debit cards. The government often gives benefits through prepaid debit rather than checks. For example, the Treasury Department issues social security benefits through a Comerica Bank MasterCard. The legislation contained an explicit exemption for government benefit cards, but also released reloadable prepaid cards.
These cards are usually marketed towards low-income people (for example, Russell Simmons’ controversial Rush Card) and have come under investigation for deceptive practices. Traditionally, prepaid debit cards function as regular debit cards but carry far more fees.
American Express’ new prepaid debit card is changing this model. The card’s only charge is a $2 fee for ATM withdrawals (though customers get one free withdrawal each month), rather than the complex and murky fee schedules that are the hallmark of prepaid debit. AmEx hopes to earn revenue, not off of those fees, but from interchange. Other card issuers are sure to follow suit in an attempt to push customers from no-longer-free checking to regulation-exempt prepaid debit cards.
Anisha Sekar writes for NerdWallet.com, a site dedicated to educating consumers about credit cards.
Pawnshop Consulting Group, Inc.