New rules proposed by the Federal Reserve for debit card transactions may mean consumers end up paying significantly more for using their cards, while big retailers such as Walmart (WMT) save money.
The Fed has issued proposed rules limiting debit card transaction fees to a "safe harbor" charge -- meaning it would not be disputed -- of seven cents per transaction, and a maximum of 12 cents. The higher costs would have to be justified by a calculation of the actual costs of processing a transaction.
The new limits are significantly below what banks have been charging the sellers -- fees of up to 2% of the actual transaction. So a $200 payment with a debit card earned the issuer $4. Banks have earned an estimated $50 billion a year through such fees.
Couldn't Be Better for Retailers
Following publication of the proposal, shares of Visa (V) and Mastercard (MA), which run the transaction networks, declined sharply. Visa was down 12% and Mastercard was down 9.5%.
Gerri Detweiler, personal finance expert for Credit.com, says the consumer could soon be facing higher charges.
"I think we could see annual fees for debit cards, and we could see additional pressure on free checking," Detweiler says. The so-called interchange fee banks charge to sellers on debit purchases had been used to subsidize free checking accounts. That may now change, she says.
While the new rules limit how much banks can charge retailers, they place no limit on how much banks can charge consumers. Presumably, this means consumers might face a new transaction costs for using their debit cards. But big retailers such as Walmart and Target (TGT) will see a significant reduction in the amount of money they pay to the debit card networks. According to the Federal Reserve, more than 35% of all noncash transactions are now paid by debit card.
"Retailers should be jumping for joy, this is what they've been asking for," Detweiler says. "For them it couldn't get any better than this."
Consumers Need to Opt In
A requirement to lower debit card fees was included in the Dodd-Frank financial regulation reform law, but the legislation left it to regulators to determine how low the fees would be set. The Fed's proposal calls for interested parties to comment on the idea before it's enacted as a rule.
The Fed also said it was proposing to end the Visa-Mastercard monopoly on the transaction networks, with two alternate networks for each type of transaction: signature debit cards and those that use pin numbers. Signature transactions typically earn a higher fee.
Banks have already been under pressure because new rules set a limit on how much they can charge for overdrafts with debit cards. The Fed rules prohibit banks from charging any overdraft fee on ATM transactions and debit card transactions unless the consumer "opts in" and actively agrees to the charges. If the cardholder doesn't opt in, the transaction must be rejected if the consumer's account doesn't have enough money in it.
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