Debit Card Limits Set Financial Reform Back
Debit cards have increased in popularity at a record pace in recent years, and for good reason. Unlike credit cards, they are tied to your checking account and when you swipe that plastic you’re instantly pulling from money you have available. There are obviously a few drawbacks to this when compared to credit cards in terms of security and protection, but many people have ditched credit cards entirely in an attempt to rid themselves of debt and manage their finances better by only spending what they have in the bank.
Well, there’s a possibility that may change. Part of this whole financial reform issue that’s been going on for a year has to do with preventing banks from gouging consumers, and to a large extent the changes are good. Unfortunately, there’s one change that’s causing a lot of resistance and banks are ready to fight back.
It’s all about the fees, baby. Banks were delivered a stiff blow last year by new regulations that limit many of the fees banks were previously able to get away with charging customers, but there’s still one fee change looming. In April, the Fed will be issuing the final rules on these fees which would then be expected to go into effect in July. Although, there is some talk just recently that the implementation of these rules may be stalled for further study. So, what are interchange fees and why should you care?
Wikipedia probably explains it best:
Interchange fee is a term used in the payment card industry to describe a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks such as Visa and MasterCard for purchases.
In a credit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller fee for the acquiring bank or ISO, which is often referred to as a discount rate, an add-on rate, or passthru.
Basically, it’s what the bank gets every time you swipe your debit card to make a purchase. Right now these fees often average between 1 and 2 percent of the transaction amount, but the Fed wants to cap fees at just 12 cents per transaction. That’s huge, because if you take a simple $50 debit card transaction and have even a 1% interchange fee, that’s 50 cents. Under the proposed rules the new cap would slash those fees tremendously. Since these fees account for billions upon billions of dollars each year it’s pretty obvious to see why banks are fighting back so strongly.
Bad News for Consumers
Banks are retaliating by threatening to cap debit card transactions to just $50 or $100. Not all banks have spoken out about this, but many of the largest banks such as JPMorgan Chase and Bank of America are certainly quite vocal about it.
The problem is that if this happens, all of the progress made in financial reform for consumers will largely be thrown out the window. We’ve been trying to get people to kick the credit card habit for years and finally debit cards have provided the relief many consumers were looking for, and now there’s a chance banks will deliver a blow to financial responsibility.
Obviously, if you’re someone who uses credit cards or cash already and pay off your bill every month this will have little effect on your spending, but for countless others who rely on debit cards for daily purchases, they may be put in a bit of a bind. When you consider filling up a tank of gas will often be over $50 and no doubt the weekly trip to the supermarket can top $100, a lot of transactions would be declined thanks to this limit.
So what are the options? It’s pretty simple, really. Debit card users will have to:
- Keep transactions under the specified limit or,
- Use a credit card
- Use cash
- Write checks
Is it the end of the world? No, of course not. Money is money no matter how you spend it, but what is gone is the convenience factor. In this increasingly digital and cashless age, the idea of writing checks or carrying a wad of cash with you feels like stepping back into the stone age. But the real problem comes when people who switched to debit cards to keep themselves from going into debt revert back to credit cards for their transactions. They may be able to pay off those transactions in full every month, but if they’ve had problems with debt in the past there’s a good chance spending could once again get away from them and unravel everything they’ve worked so hard to control.
It’s an even bigger issue because thanks to credit card companies tightening their belts they have cut credit off to many lower credit consumers, and even reduced credit limits for those with good credit. I know a few of my credit cards that I used dropped my credit limit in some cases down to just $500! That’s not very practical if that’s your only option. For many others, getting a new credit card is out of the question, although CreditLoan does provide a few cards that are easier to get approved for.
It’s easy for people to say just use a credit card and then immediately, or weekly go in and pay everything off, but this is difficult for many. So if these rules do eventually go into effect and banks do start limiting debit card transactions to some ridiculously low dollar amount, the so-called financial reform will backfire and put more people back into debt.
Credit Card Options
It still isn’t clear if these rules will go into effect or if banks are just using this as a scare tactic, but if you’re a big fan of using plastic now might be the time to prepare and get the best credit card to handle all of your daily spending. If you have to use plastic and are responsible by paying your bill every month, you might as well get the most cash back or rewards you can to stick it back to the banks. For everyday purchases the new Discover Clear card is a pretty good option. 5% cash back all year long on rolling spending categories.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Your article is informative, but leaves out some important detail for the consumer to understand. Visa & Mastercard offer Zero Liability to the consumer and the merchant is guaranteed payment. These guarantees come at a price, which is covered in the interchange fee. In the case of fraud, the issuer is stuck with the loss. Not the consumer or the merchant. The interchange fees that a financial institution receives offsets the cost of a very costly and risky product to the consumer. And a very important question remains unanswered....Who will benefit from a reduction of these fees? Will the consumer? Think again. Large retailers are predicting millions of dollars in revenue added to their bottom line when the rates change. Financial Institutions will not be able to continue to offer a product that is expensive and risky without offseting this expense with other fees.
First a product is introduced, the consumar come to a point where they can't live without the product then you are feed and or taxed to death. Look, we as consumers have power. There is facebook, twitter, hundreds of blogs, email, text, chat and so on. We don't have to take it. Start a campaign, swap information and just down right boycott. There is power in numbers. Now, when and if you are notified by your bank on some obserd fee let them know that you are taken your business some place else then do it. The banks are not loyal to you so don't think twice about leaving.
It might be time to go back to credit unions and the like. Their fees are typically very minimal and they seem to retain a more customer friendly attitude. At least that's the case with mine.
Liz is correct, many card issuers (Banks) are responsible for covering any fraud losses which can total thousands of dollars for one customer. Even if the merchant obviously did not verify a signature as they do not have any liability from Visa or MasterCard. Therefore if a $500 transaction is capped at a 12 cent fee, why would the Bank's keep taking the risk? This is a huge blow to the smaller communtiy banks who do not charge the numerous fees that the big banks do, so that they can stay competitive. Technically the legislation has language to allow for smaller banks to recieve more revenue per transaction but does anyone think that Visa or Mastercard aer goign to build systems to track this?