Rumor has it that JPMorgan Chase, one of the nation’s largest banks, may soon start limiting debit transactions to $100, or even as little as $50. According to recent reports, the cap would apply even when you run your debit card as credit. The question everyone seems to be asking is; why on earth Chase would think of doing such a thing?
It all comes down to something called interchange fees. As it stands right now, every time you swipe your debit card, your bank charges the retailer a fee. The current average fee charged is 44 cents. Your bank then shares that fee with its partners. That may seem like a pittance, but all of those small fees add up over the course of a year. Federal Reserve data from 2009 reports that those fees add up to $16 billion per year.
That could all change in July thanks to Wall Street reform enacted last year. According to current rules proposed by the Fed, interchange fees would be capped at 12 cents per transaction. That’s enough of a change to cost Chase about $1 billion in revenue every year. Under current industry standards, banks use their extra fee dollars to shore up losses from unrecoverable fraudulent charges. As the size of a transaction grows, so does the associated risk. Faced with chances of losing large amounts of revenue, banks argue that there is little reason to open themselves up to the added risk of larger transactions. Other banks are already looking for legal ways to recoup lost revenue using other fee structures. Chase is testing $3 monthly fees on debit cards. In some states, Chase is trying $15 fees on checking accounts.
What does this mean for you?
Well, for starters, it’s tough to predict the banking industry pricing model after Wall Street reform. Wells Fargo and HSBC have yet to comment on possible transaction caps. Citi has said that they plan no changes at this time. Where the industry winds up depends on what consumers demand. If banks find their accounts fleeing to others who offer consumers more flexible spending options, banks might respond with more flexibility. Of course, debit spending caps may also become the new industry standard if few banks are willing to take the risk of larger debit transactions. Chances are that many banks will cancel their debit rewards programs, as their debit transactions will no longer be lucrative enough to subsidize rewards programs.
If most major banks adopt capped debit transactions, consumers will soon be limited to cash, checks, and credit cards for transactions above their cap. So, consumers could be faced with the added inconvenience of carrying a checkbook or extra cash. Others could find themselves using a credit card more frequently than they used to. There isn’t necessarily anything harmful about using a credit card more often, as long as you live within your means and pay your balance off in full. So long as you don’t pay interest, your credit card can be a convenient consumer spending tool. The people most likely to be harmed by this shift are those with poor credit. Many consumers with dodgy credit have trouble qualifying for cards. When they do, the cards often come with a host of exorbitant fees.
There’s little you can do before banks announce plans to shift their fee structures and user terms. However, you can certainly check in with your bank and ask what fee change plans are in the works. There’s also nothing stopping you from telling your bank that you’ll move to another bank with more flexible spending options if they adopt a capped debit purchase structure.
Published or updated March 15, 2013.