Interchange Fees Forum

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 the fee was “reasonable.”

At the end of June, the Fed said it was cutting the fee – but not by nearly as much as merchants wanted.

Merchants pay an average of 44 cents every time they swipe a debit card, 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 12 cents per transaction, but banks warned of dire consequences – such as the demise of free checking – if their incomes were 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 banks with at least $10 billion in assets, takes effect Oct. 1.

“The banks, any time they lose income, we eventually pay for it,” said Bill Hardekopf, CEO of LowCards.com, a credit card comparison website based in Birmingham, Ala.

Meanwhile, retailers contend their savings will be passed onto consumers.

“We think it’s going to benefit the public more than the merchant,” said Stanley Martin, general manager for Lansing-based Quality Dairy stores and gas stations. “Usually in something like that, whatever the reduction in cost to the merchant is, in time gets reflected to the customer anyway.”

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.

New York’s JPMorgan Chase & Co., the second-largest issuer of debit cards, told 8 million card customers in March it would eliminate its rewards program in mid-July because of the cap on interchange fees.

“You’re going to see either fees increase or you’re going to see benefits that they currently get go away,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, an advocacy group for banks, credit unions and credit card companies. “Rewards cards on debit is just a thing of the past.”

Free checking

• 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 American Bankers Association.

Consumers might 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.

PNC Bank, which has several banks in the Lansing area, changed its checking accounts in March in anticipation of the swipe fee changes.

“If you want a no minimum balance, no fee, free checking account with no frills or anything, we’ve still got it for you,” Joseph Guyaux, president of Pittsburgh-based PNC Financial Services Group Inc., the bank’s parent, said during a recent visit to Lansing.

More prepaid cards

But he said customers must do more business with the bank than simply maintaining a free checking account in order to access benefits such as point rewards or free out-of-network ATMs.

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 growing prepaid card market, Feddis said.

And banks might bring back charge cards – credit cards that must be paid off every month – to appeal to consumers who want to control their spending, she said.

• 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 said, 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.

Not all merchants agree with that. Habib Jarwan used to require a $5 minimum for credit or debit card purchases at his East Lansing restaurant, Bell’s Greek Pizza. But he did away with that last year to cater to his customers, mainly college students who don’t always carry cash.

Smaller players

Banks, too, might steer consumers, but away from debit to credit cards, Harde-kopf said. He said he’s noticed banks have sweetened credit card reward programs in the past year for good customers, giving them more incentive to use that plastic.

• Smaller players affected. Though the rule only applies to financial institutions with $10 billion in assets, smaller banks and credit unions say they’ll end up with less fee income, too.

Market pressures will force smaller institutions to change their ways, said Brian McVeigh, senior vice president of corporate services at Lansing-based Lake Trust Credit Union.

“We would definitely see a reduction in the revenue,” he said, adding that the credit union would look at cutting costs before tacking on more fees. “We really want to minimize the impact on our members.”

Baltimore Sun personal finance columnist Eileen Ambrose and Lansing State Journal writer Melissa Domsic contributed to this report.