Banking might never be the same.

Traditional banking business models relied primarily on interest income from lending client deposits. However, in the past few decades, fee income has become an increasingly critical revenue stream for financial institutions. In 2009, banks collected over $38 billion in overdraft fees alone, with many banks reporting that this fee revenue exceeded their net income. However, since the financial bottom fell out a few years ago, legislators and regulators have taken aim at more than one of these types of cash in-flows. In 2009, the Federal Reserve restricted overdraft fees on ATM and debit cards, and on June 8, legislators rejected a plan to delay another Federal Reserve regulation limiting debit card “swipe fees” (the amount a card issuers, namely Visa and Mastercard, charge a retailer per debit card transaction). As part of the Dodd-Frank Wall Street Reform Act, this proposed rule will curb fee revenue for banks, which collected $16 million in swipe fees in 2009 (with some reports as high as $20 billion)

Currently, the average cost of a debit card swipe is 44 cents, with large financial institutions typically carrying a lower per-transaction fee than small firms. Several months ago, in an initial statement regarding fee caps, the Fed proposed limiting these fees to 12 cents per swipe, based on a report that found that the median total processing cost for debit transactions is 11.9 cents per transactions. As banks and credit card companies lobbied aggressively for the delay and restructure of the bill, they were met in-kind with lobbyists sent from large retailers, both sides portraying the fee-fight as one of behemoth financial interests against small town banks or mom-and-pop shops (The law excludes institutions with assets of less than $10 billion). Retailers argued that savings would be passed directly to the customer, while banks insisted that 12 cent swipes would not cover the many services subsidized by these fees, including debit card fraud and free checking accounts.

On June 29^th, the Fed made a final decision, more lenient than the original proposal. Beginning in October 2011, banks can charge retailers up to 21 cents per debit card swipe, plus .05% of the purchase price to cover the cost of fraud protection. Of those financial institutions affected by this legislation, smaller banks and credit unions were the most relieved, while many in the retail industry expressed great disappointment. Both debit card issuers and retailers argued that any increase in cost would be passed directly to the consumer, leaving decision makers in a tough spot. In fact, Ben Bernanke, the Federal Reserve Chairman, was quoted as saying it was, “one of our most challenging rulemakings” under the financial regulatory law.

While some retailers express disappointment in the final ruling, they were able to avoid proposed delay and did succeed in capping fees well below what the current average has been, which begs the questions, how will banks likely react? With estimates of lost revenue hovering around $12 billion (and Chase claiming $1billion alone), banks will certainly look for ways to make up those dollars. Some ideas circulating in the industry include annual debit card fees, limiting the number of debit card transactions or even the size of debit card purchases. More extreme examples include penalties for insufficient direct deposits or daily average balances under $1500. As fees take new forms in this new world of banking, fringe customers will continue to be pushed out of conventional banks and the use of alternative financial providers will increase. OpportunityTexas is committed keeping Texans informed on the most up-to-date changes in the banking industry and resources for navigating the ever-changing landscape.