One of the nation's largest banks, JPMorgan Chase, is contemplating capping debit card transactions at either $50 or $100. This leads to a logical two-word question: "Um, why?"
The answer is something called interchange fees. Right now, banks charge retailers an average of 44 cents every time customers swipe their debit card to make a purchase. The bank shares this fee with its partners. As you can imagine, those interchange fees add up to some serious scratch--$16 billion per year in 2009, according to the Federal Reserve.
However, as part of the Dodd-Frank legislation going into effect in July, interchange fees will be cut to 12 cents per transaction. The reduction in interchange fees will likely cost banks such as JPMorgan Chase and Bank of America more than $1 billion per year.
This legislation has left banks scrambling to find a way to make up for that revenue. One way is to discourage debit card purchases by introducing a cap of $50 or $100.
If banks cap debit card transactions, customers will be forced to write checks, withdraw cash from ATMs, or put spending on credit cards. All three methods will lead to increased fee-based revenue for banks capping debit card transactions.
You need a checking account in order to write checks. The checks themselves are not free to order and banks are poised to add fees to your once-free checking accounts. JPMorgan Chase is currently testing monthly fees to checking accounts--up to $15 per month in some states. They're also considering charging customers $3 per month just for owning a debit card.
As long as there have been ATMs, there have been ATM fees. Those fees continue to rise. And since you'll need to pay more frequently with cash, expect to hit the ATM more often.
Many consumers will rely more heavily on credit cards if their debit card transactions are capped. Consumers with sub-par credit that are fortunate enough to be approved for credit cards often have higher rates and fees. If they cannot afford to pay off their balance every month, they will experience huge fees that will compound quickly and generate sizeable revenue for banks.
And that's the worst part about this proposed cap for debit card transactions. One of the fundamental values of debit cards is they allow consumers to spend money they already have and, in turn, manage their finances responsibly. By inserting obstacles in front of debit card purchases, banks would drive consumers back to credit cards and the reckless spending that routinely puts families in financial peril.
Which leads to one final question: When can we start COMMON Bank?
By Gino Bona