New Law on Debit Card Swipe Fees Effective October 1, 2011

The Durbin Amendment to the Dodd-Frank Act was signed into law by President Obama on July 21, 2010. This amendment sets a cap on debit card fees charged to merchants by the banks that issue the cards.  These fees are more commonly referred to as swipe fees or interchange fees.  The effective date has changed from July 21, 2011 to October 1, 2011.

Prior to this amendment, the average amount charged to a merchant for a debit card transaction was $.44.  Banks will be allowed to charge merchants $.21 for each debit card transaction, plus .05 percent of the purchase price for fraud protection.  It does not apply to credit cards, government issued debit cards, prepaid cards or debit cards issued by banks and credit unions with assets under $10 billion.  What’s the impact to consumers?…

Consumer impact

If you use a debit card, the banks won’t be making as much on your transaction.  Banks may look at ways to make up the revenue loss by eliminating free checking, charging annual fees for debit cards, charging a monthly fee for debit cards or increasing checking account fees.

From June 16 to 20, Association Press-GfK conducted a poll of 1,001 adults asking their reaction to being charged for debit cards; 715 were credit card holders and 706 debit card holders. As you would expect, the more they would have the pay, the less likely they would use the debit card.  If the fee was $3 a month, 61% would find another way to pay; it increased to 66% at $5 month; and 81% at $7 a month.

Merchant impact

The associations pushing this amendment were the National Restaurant Association and the National Retail Federation. This has a huge impact on them and cuts their transaction fees in half.  They may decide not to accept debit cards from smaller banks because the transaction fee is higher.

Will this amendment control the fees?  Since smaller banks were exempt, this puts them at a disadvantage.  How will the banks recover from the loss in transactions fees?  Will they charge consumers more for checking or debit cards or both?  Will the consumer be the one that pays for this?  Will consumers increase the use of credit cards?  Only time will tell.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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