Limits on interchange fees, or fees banks charge merchants on debit card transactions, have begun to take effect. As a result, interchange fee revenue has begun to plummet at some of the nation’s largest banks.
Financial reform dealt significant blow to banks
Part and parcel to the Dodd Frank Act, the financial reform laws passed in 2009, was an addendum referred to as the Durbin Amendment. The addition is named for its sponsor, Senator Dick Durbin of Illinois. The amendment’s key provision is for the Federal Reserve to set limits for interchange fees.
Also called swipe fees, the fees are incurred by merchants, who have to pay banks in order to receive the funds that customers spend with their debit cards. The Fed, according to the Washington Post, initially projected a limit of 12 cents per swipe, but after heavy lobbying revised the proposed limit to 21 cents per transaction, plus 5 basis points of the total and a 1 cent conditional charge to prevent any possible fraud, according to Bloomberg.
Previously, interchange fees were 1.14 percent of the amount of the transaction.
Predictably, the Federal Reserve found in a recent survey that the amount of money banks are collecting on swipe fees is plunging.
According to MarketWatch, the average debit card transaction of $38, resulted in 43 cents of revenue at most banks with assets of $10 billion or more. Merchants paid 23.9 cents per transaction in the first quarter of this year, a 45 percent decline from fees observed in 2009. In the last quarter of 2011, merchants were paying 24 cents per transaction, as the swipe fee cap took effect on Oct. 1, 2011, according to the Washington Post.
Smaller banks, however, still collected 43 cents per transaction, as the swipe fee cap exempts any bank with less than $10 billion in assets from the fee cap. Some prepaid debit cards, according to the Washington Post, are also exempt. Fees averaged 30 cents per transaction on swipe fees from all banking institutions.
Pay less with pin
Swipe fees also vary depending on whether the customer verifies the transaction by signature or by entering a personal identification number. Prior to the swipe fee cap taking effect, merchants paid an average of 59 cents per transaction for those authorized by signature and 34 cents per transaction authorized by PIN.
In the latest survey, merchants paid an average 24 cents per transactions with signatures and 23 cents per transaction authorized by PIN.