Are Debit Card Usage Fees Fair to Consumers?

With the Federal Reserve Board looking at capping debit card usage fees at 21 cents, rather than the 12 cents they originally proposed, consumers are wondering whether these fees are fair to begin with.

A debit card usage fee is a fee that banks charge to process a transaction using a PIN account, rather than a credit card. These fees range from 5 cents to as high as 44 cents for the right to use ones own money. Consumers have to remember to use their debit cards as credit cards to avoid these fees. This is a feat that can be tricky with many card readers at stores.

Consumers are not happy with fees attached to using their cards to access their money. Small businesses and retailers are also joining the fight, claiming that these fees take money away from the small business owner. It is more expensive for them to use the credit card networks than the debit card network, a fact that has not been lost on the banking industry. The banking industry has raised the fees associated with the debit card network, leading business owners to charge more for goods and services.

Small business owners have fought with banks over network fees going back to the 1990s, when banks started charging higher rates for credit card networks at a time when credit cards were growing in popularity. These fees were hidden from the consumers, being paid by businesses instead. Debit card fees, however, are being paid directly from consumers to the tune of $20 billion dollars annually.

Banks claim that these fees help provide the money to enable lending and stay competitive. Consumers and business leaders disagree, saying that the banks are taking money away from small businesses and consumers. These fees have continued to escalate, particularly in the period following the Credit CARD Act passed in 2009. With caps on fees and interest rates, banks began quickly looking for ways to increase revenues without violating the Credit CARD Act. Debit card usage fees were one way the banks made up income from lower credit card returns.

The Federal Reserve Board originally proposed a 12 cent cap on debit card usage fees that would have gone into effect on July 21st. Due to lobbyist pressure from financial institutions, the cap that was approved was 21 cents per transaction, with an effective date of October 1st. The delay in instituting the cap is to allow financial institutions to notify consumer and business owners of the new fees. Banks have three and a half months to prepare their accounting software to recognize the new caps.