Fed to Impose Cap on Debit Card Swipe Fees Paid by Merchants

In another move that is sure to backfire on consumers, the Federal Reserve is proposing a cap on interchange fees paid by merchants when you swipe your debit card at a store. The proposed cap is 12 cents per transaction, when according to Eileen AJ Connelly of the AP, the current rate is 1 to 2 percent of the transaction value, with a current average of 44 cents per transaction. The proposal is touted as a change that could encourage merchants to pass on the savings to customers. Do you believe that? I don't.

More likely, the change will cause banks to further restrict free checking. The many high interest checking programs that reward customers for paying bills online and swiping their debit card and signing, rather than using a pin number, will be forced to lower the rates offered. I'm earning 4% interest on my checking account through one of these programs and don't look forward to losing my high interest rate.

Banks, just like retailers, are in their respective businesses to turn a profit. These interchange fees have been a source of income for banks and a cost of doing business for retailers since the beginning. Credit and debit cards boost sales for retailers because customers don't have to carry around cash when making purchases. Studies have also shown that customers will typically spend more when purchasing with credit or debit cards versus cash. If the proposal passes as it stands, retailers will gain this benefit without paying for it. Banks will have to find other ways of boosting revenue or decreasing costs to account for the loss of fee income, and you can bet it will be the consumer who will bare the brunt of this new search for income or cost savings.

Another 'incentive' this proposal offers is that it encourages competition. However, I doubt this will have the effect that is desired. More than likely, you'll see an increasing number of merchants refusing to accept various cards. Fees are only being capped for debit cards. Credit card interchange fees are being allowed to remain at current levels.

While financial reform is a popular subject in this country right now, this isn't a good proposal. Its initial effects will be invisible to consumers, as they don't pay the interchange fees. However, the costs of this proposal will soon start showing up in the form of lower checking interest rates, increased checking fees, and more of a hassle when paying by card at your local store. Anyone expecting lower prices at stores as a result of this proposal is living in fantasy-land.