Debit Card Fees Under Spotlight

Moody’s recent credit update on the US banking sector noted that the credit rating agency is expecting a slow return to acceptable credit conditions. One of the numerous aspects of the report revealed that loan charge-offs had continued to decrease, reaching the level of 2.6 percent of loans in the fourth quarter of 2010. This is the lowest level since the fourth quarter 2008, but is still considered to be too high. Based on data indicating estimated losses on charge-offs being in the region of $744 billion between 2008 and 2011, and with around $548 billion in losses having already been incurred, Moody’s anticipates an estimated $198 billion being written off by the end of the year. So it appears that more consumers are in the position to settle their debt, and hopefully start spending again to boost the economy and the business of providing credit.

However, a new development in the banking industry is set to present challenges as the Federal Reserve proposes a limit of a 12 cents bank fee per debit card transaction. Many consumers, who prefer to pay cash rather than use a credit card, use a debit card for purchases. This does away with the need to carry cash, which in some areas can be a risky business, and because the money comes directly off the card holder’s account, the merchant is guaranteed payment. Currently most banks claim an average of 1.14 percent of a purchase from the merchant as a processing fee. Even though the merchant is liable for the processing fee, which on big-ticket items works out to be very expensive, payment by debit card is preferable to accepting personal checks which have the potential to bounce. Some merchants work the processing fee into the price-tag to cover this cost. So it stands to reason that merchants are backing the Fed’s proposal, seeing the potential to pass the savings onto the consumer in the highly competitive retail industry.

The banks, however, are not so thrilled, complaining that 12 cents per debit card transaction is not enough to cover their costs, and that the loss in revenue will impact negatively on the banking industry. It has been estimated that bank revenue will fall by between $3.6 billion and $9.1 billion per annum. There is speculation on steps that banks may take to offset these losses, including increasing annual fees to debit card holders, and limiting the value of debit card purchases to a maximum of $100.

An analysis by the Federal Reserve determined that it takes 12 cents for a bank to process a debit card transaction, but banks say they need the extra money raised by larger transactions to offset losses incurred by fraudulent charges. However, banks that penalize their debit card users are likely to find themselves losing customers, as there are smaller local banks that may be more flexible with regard to fees on debit cards.