Will Your Debit Cards Bounce?

Believe it or not, when you swipe your debit card sometime later this year – it might bounce. Yes, it can if your purchases cross a specified amount.

We see this waiting right around the corner as banks are mulling over how to recover some money that they are bound to lose with interchange fees being slashed pursuant to the Wall Street reform legislation last year.

So, if you want to purchase for more than the amount specified and approved, cash is the next best option to using a credit card. At least cash can’t bounce, and it makes you more conscious about your spending.

What are Interchange Fees?  

For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (V - Analyst Report) and Mastercard Incorporated (MA - Analyst Report). The charged amount is called interchange fees.

According to Federal Reserve’s 2009 data, on average, banks charge a retailer 44 cents per transaction as interchange fee. Though the amount seems small, the extensive use of debit cards totals it to a solid $16 billion for the industry every year.

Cap on Interchange Fees

As part of an overhaul commanded by Wall Street reform legislation, the Federal Reserve might cap the interchange fees for mega banks at 12 cents per transaction, effective July. This represents about 73% decrease from the previous average, draining huge revenues from the industry.

Which Banks to Fix Up and How?

The proposed capping on interchange fees will cost JPMorgan Chase & Co. (JPM - Analyst Report) more than $1 billion per year. JPMorgan is not sitting idle; it is contemplating a limit of either $50 or $100 per transaction on customers’ debit card, CNNMoney reported on Thursday.

What’s more, JPMorgan has already imposed a $3 monthly fee on its debit cards and a $15 fee on its checking accounts in some of its operating areas. The company has also stopped issuing debit rewards.

Among others, Bank of America (BAC - Analyst Report) and Wells Fargo (WFC - Analyst Report) are also looking to recover their lost debit card fees. Some banks are also planning to issue more prepaid cards that will provide customers with the facilities of plastic money.

Was This Intended?

The Federal Reserve’s proposal to slash interchange fees was primarily intended to resist banks from earning super-normal profits. This saving was backed by the noble intention of trickling this money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.

But are managements of these big banks philanthropists, quitters or idiots? Precisely, they are none of these. It’s only a matter of time before they are get things back on track for themselves.

Banks are moaning that slashing interchange fees would reduce their financial ability to protect themselves against fraud as money from interchange fees helps to offset what they lose due to fraudulent transactions. As a result, they are putting a cap on the amount of transaction, which would help them recover some money and reduce the risk of bulk transactions. However, the ultimate impact would fall on consumers who genuinely depend on a debit card.

For consumers who fail to qualify for a credit card due to bad credit, the cap on debit card transactions will make daily transactions difficult. If they somehow manage to get a credit card, they will have to pay higher fees. But a credit card always carries a fee. This leaves us with the only costless alternative of carrying out transactions through cash and checks. Then again, there are limits on daily ATM transactions. And so the story continues.

Read the full analyst report on JPM

Read the full analyst report on MA

Read the full analyst report on V

Read the full analyst report on WFC

Read the full analyst report on BAC