The Federal Reserve is preparing to issue its final rule on the controversial debit card “swipe fees” Wednesday, a move that could potentially lead to less favorable interest rates on high-yield checking accounts and unattractive terms and yields on other banking products and services.
In its December draft proposal, the Fed suggested capping debit card interchange fees, or “swipe fees,” at 12 cents per transaction — a move that critics say would slash revenues by 75% for financial institutions and other companies that process debit card transactions. Currently, merchants pay financial institutions an average of 44 cents to 45 cents per transaction, says Patricia Hewitt, director of debit advisory service for Mercator Advisory Group.
The Fed’s anticipated action is in response to the Durbin Amendment, which is part of the massive Dodd-Frank Wall Street Reform and Consumer Protection Act that became law in July. The Durbin Amendment is slated to take effect on July 21 and will reflect the Fed’s final rule on debit card interchange fees.
“When the Federal Reserve meets Wednesday, we doesn’t expect a material change from their earlier proposal of 12 cents,” says Hewitt, who served as lead author for her firm’s report, The Durbin Amendment: Impact Analysis. She added it’s unlikely the Fed will consider raising the bar to 24 cents per transaction.
Making It Harder to Get High Yields
With their revenue expected to be squeezed, financial institutions may dramatically alter the interest rates they pay on high-yield checking accounts or bump up the number of debit card transactions an account holder needs to make in a given month in order to maintain such an account, notes a Bankrate.com 2011 report on high-yield checking accounts.
According to its survey of 155 financial institutions, Bankrate found the average interest rate paid on a high-yield checking account was down to 2.56% this year, compared with 3.3% last year.
The declining yield is a byproduct of simple supply and demand. Financial institutions are finding themselves flush with cash, as customers deposit funds into high-yield checking accounts and basic savings accounts. But financial institutions are facing a tough time finding qualified customers who want to borrow the money sitting in their vaults.
High-yield checking accounts, which have seen their yields decline, still pay more than a traditional checking account yield of 0.1%. Interest rates for high-yield checking accounts are comparable to those from certificate of deposit, but consumers have the added benefit of instant access to their money.
Banks do make consumers jump through a few extra hoops to get those high-yields, however. A majority of these accounts require customers to make 11 debit card transactions a month and use some of the institution’s other services like direct deposit or online bill pay — services that provide other sources of income for the bank.
But should the Fed require a 12-cent cap on debit swipe fees, financial institutions would need to bump up their per-month transaction requirements for high-yield checking accounts to somewhere in the neighborhood of 37 a month to generate a similar amount of revenue, estimated Claes Bell, a Bankrate.com reporter.
Requiring customers to sign up for a greater number of services to obtain a high-yield account may be another action institutions may look at, says Hewitt. “I think the bundling of services and relationships with consumers will change,” she says. “Financial institutions will be looking more closely at the profitability [of high-yield checking accounts] in a different way.”
She added although financial institutions and card processors could see their profit margins squeezed with the Durbin Amendment, it’s unlikely they would exit high-yield checking accounts.
“They want consumers who carry high balances,” says Hewitt. “We may see them require a higher minimum balance for an account, or require customers to have a second relationship or account with the bank. They’re looking for a second revenue stream.”