Some of the biggest U.S. banks, including JPMorgan Chase, Bank of America and Citigroup are considering placing a limit on the amount of debit card transactions in the latest phase of their battle with retailers and legislators over the size of interchange fees — the amount card issuers charge merchants for each transaction involving one of their cards. Currently, interchange fees are set biannually by Visa and MasterCard.
Banks Mulling $50 – $100 Debit Transaction Limits
JPMorgan Chase is said to be considering placing a $100 limit on debit transaction size, if the interchange fee limit, proposed by the Federal Reserve, goes into effect in April in its present form. Other top-tier banks are mulling limits in the range $50 – $100.
The idea behind the move is to force consumers to use credit rather than debit cards for their larger purchases. The reason this makes sense for banks is that the proposed interchange cap would replace the existing rate, which is made up of a percentage and a fixed amount components (e.g. 1.03% + $0.15) with one consisting solely of a fixed fee of $0.12.
So under the proposed rules, banks would be making much less profit from high-amount debit card transactions. For example, a $10 debit purchase would result in a 1.20% profit for the card’s issuer, while the equivalent amount for a $100 transaction would be 0.12%.
Credit card interchange fees, on the other hand, will remain unchanged. Even under the current rules credit card transactions are much more profitable for issuers, but the debit fee cap will only increase the size of the gap.
The Stakes: Up to $25 Billion a Year
Debit card issuers stand to lose a lot of money from the proposed fee limit. Estimates vary from $13.6 billion in annual revenue, according to CardHub.com report to $25 billion, according to a report from Boston Consulting Group (BCG).
If the $0.12 per debit transaction does go into effect, it would represent a 70 percent decrease from the average fee of $0.44 cents per transaction in 2009, according to Fed’s own analysis.
Americans Love Their Debit Cards
If passed as currently proposed, the effects of the interchange fee rule are likely to be felt even stronger by card issuers in the coming years, as debit card use in the U.S. is on the rise, surpassing credit card use in 2009, according to a study by Javelin Strategy and Research, a consulting company.
In 2009, the share of consumers who said they used a credit card in the previous month fell to 57 percent from 87 percent in 2008, according to the Javelin study, which predicted a further drop to 45 percent in 2010. Debit card use, on the other hand, grew by 5 percent for the period.
The Takeaway: Banks Will Find a Way to Make Up for Their Losses
At this point it seems likely that the $0.12 interchange fee cap will be revised upwards, before it goes into effect next month. Whatever the final version, however, it will still lead to hugely reduced revenues for the card issuers and they have plenty of tools at their disposal that can be used to limit the damage. In addition to placing limits on debit transaction amounts, issuers may start charging fees for using debit cards and limit or altogether eliminate debit rewards programs.
We know how resourceful banks can be even in normal times. Now, with their backs against the wall, their inventive skills are likely to shine even brighter. In the end, “[w]e will be appropriately paid for the services we provide,” as Charlie Scharf, head of retail financial services at JPMorgan Chase told the Wall Street Journal.
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