You might not have paid attention to the fierce yearlong battle between merchants and banks over debit cards, but you’ll likely notice the outcome in your wallet.
The dispute was over the debit card interchange fee — the payment merchants make to banks to process customer transactions.
Last year’s Wall Street Reform and Consumer Protection Act law required that the Federal Reserve ensure that the fee was “reasonable.”
At the end of June, the Fed announced it was cutting the fee — but not by nearly as much as merchants wanted.
Even so, consumers can expect repercussions.
“The banks, any time they lose income, we eventually pay for it,” said Bill Hardekopf, chief executive of LowCards.com, a credit card comparison website.
Debit and credit cards both have interchange fees, but the new rule applies only to debit cards — the plastic of choice among consumers.
When you swipe a debit card, the merchant pays an average of 44 cents per transaction, according to the Fed.
This fee in 2009 generated more than $16 billion in revenue for banks.
The Fed had proposed capping the fee at cents per transaction, to the delight of merchants. But banks warned of dire consequences — such as the demise of free checking — if their income was slashed.
The Fed settled on a maximum fee of 21 cents plus 0.05 percent of the transaction amount. That works out to about 24 cents on the average $38 debit purchase, the Fed said.
The new rule, which applies only to big banks, takes effect Oct. 1.
Merchants were crushed.
“It shows you the strength of Wall Street,” said Rob Santoni Jr., chief financial officer of Santoni’s Supermarket in Baltimore. “Main Street retailers and grocers just aren’t as important” to the Fed.
Banks were relieved that the fee cut wasn’t deeper. Still, the American Bankers Association said fee income will be reduced by 45 percent, and consumers will end up paying higher fees for basic banking services.
Here are other changes industry players say consumers will see:
Fewer reward programs: Banks had started to dump or restrict reward programs on debit cards in anticipation of the loss of interchange fee income. And that’s likely to continue.
JPMorgan Chase, the second-largest issuer of debit cards, told 8 million debit-card customers in March that it would be eliminating its debit-card rewards — including airline miles and cash back — in mid-July because of the cap on interchange fees.
Goodbye, free checking: It costs $250 to $300 a year for banks to provide a full-service checking account, a service subsidized partly by overdraft and debit-card interchange fees, said Nessa Feddis, senior counsel with the bankers association.
Consumers can expect to see banks do away with free checking or require customers to clear more hurdles — such as meeting minimum balances, using direct deposit or having more than one account at the bank — to avoid paying a fee for checking, she says.
More kinds of plastic: The new fee limit doesn’t apply to credit cards and certain prepaid cards.
As a result, consumers will see more banks jump into the prepaid card market, which has been growing anyway, Feddis said. And banks might bring back charge cards, which are credit cards that must be paid off every month, to appeal to consumers who want to control their spending, she says.
Steering: LowCards’ Hardekopf said retailers might encourage the use of cash or debit cards, instead of credit cards that will maintain the old interchange rates.
For instance, he says, a merchant might offer a discount to customers paying in cash rather than credit. Or retailers might not permit a credit card to be used for small purchases.
Baltimore grocer Santoni, however, said merchants aren’t going to risk alienating customers by dictating what type of payment they must use.
“That’s business suicide,” he said.
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