Financial Institutions Finding Ways to Recoup Lost Debit Interchange Revenue

Sarasota, FL, October 3, 2011/Internal Release/ - In preparation for the October 1st implementation of the debit card interchange cap banks are forewarning of measures they will be taking to compensate for revenues lost due to the Durbin Amendment. Wells Fargo is instituting a $3 monthly fee for consumers who use a card linked to their checking account, even if they only make one purchase on the card in a month. The debit card activity fee will be rolling out two weeks after the debit interchange cap goes into effect, for the time being it will only be for Wells Fargo customers in Georgia, Oregon, Washington, New Mexico and Nevada. Chase began testing a similar $3 monthly fee back in February; the test is still ongoing in Wisconsin.


Consumers will not be happy with these changes, especially if they don’t believe the Durbin Amendment has led to lower retail prices. In June the Associated Press and GfK conducted a poll asking consumers how they felt about these debit card usage fees. 61 percent of debit card holders surveyed indicated they would switch to another form of payment if their bank started charging a $3 monthly usage fee on debit cards. As the fee increased so did the percentage of respondents that would stop using their debit card. 66 percent would switch to another payment method if the fee was $5 and 81 percent would stop using their debit card if the fee was $7 per month.


There are a few different ways financial institutions are implementing disincentives to reduce debit card use. The most direct method is by charging fees for using your debit card, this can be a flat monthly fee or a per usage fee. Other methods include eliminating debit card rewards, imposing transaction limits and charging more for basic banking services such as checking accounts. To consumers the affect of the Durbin amendment will likely be a net loss. Consumers who may not even use debit cards can see increased banking fees and those who prefer to use their debit card will likely have to start paying for it. Meanwhile the lower retail prices consumers were told they’d see as a result aren’t likely to come into fruition.


At the Direct Response Forum nearly 170 executives for major retailers were asked about the impacts of the debit card interchange cap and their preparation for it. One of the biggest arguments surrounding the Durbin Amendment was whether or not any cost savings would actually be passed on to the consumers. 41 percent of the survey respondents indicated that debit card fee savings would not be passed down to their customers, although 56 percent said they aren’t sure what impact the ruling will have on their business.


To make matters worse Visa and MasterCard are increasing the debit card interchange fees for small ticket purchases. The Durbin Amendment mandates a debit interchange cap around 23 cents, but it doesn’t stipulate a lower cap for small dollar transactions. A 23 cent interchange fee on a $1.50 transaction is completely within the rules of the Durbin Amendment, and according to several analysts this is exactly what Visa and MasterCard are planning. Whereas before the Durbin Amendment merchants paid about 8 cents for a $2 transaction, they can soon be paying 23 cents. The Durbin Amendment will benefit merchants selling higher value goods and services, but convenient stores and coffee shops will see a sharp increase in their debit card processing fees from 4 percent to 11.5 percent of a $2 transaction. This will most likely lead to all merchants instituting a minimum transaction amount for a debit card purchase.

Although Visa and MasterCard set the rates the debit interchange fees go to the debit card issuers, not the card associations. But the card associations are helping their partner banks recoup some of the estimated $6.6 billion in annual revenue that will be lost after capping debit interchange. Increased banking and debit card usage fees will not be well received by consumers, especially when merchants begin implementing a minimum purchase amount to use a debit card to avoid losing money on small transactions. In recouping these losses the financial institutions will be driving consumers to new forms of payment, which may be to the benefit of the up and coming mobile wallets.