Editorial: Fed Interchange Cap to Spur Debit Card Limits Posted by AVCU on 3:47 PM

In an American Banker editorial, Open Solutions CEO Louis Hernandez Jr. argues that the inability of debit card issuers to cover their costs of fraud and security may likely force those issuers to limit their exposure by putting a ceiling on debit card transactions at $50 or $100, forcing restrictions on services for consumers. Further, her argues, another unintended consequence of the Durbin amendment will be the disappearance of free checking. According to Raddon Financial Group Research, one-third of all households would switch their primary bank if it stopped offering a free checking account. The nation's biggest banks have all eliminated truly free checking so, at least in theory, this bodes well for community institutions. 


But hold up a minute. In order to offer free checking, Hernandez argues, a bank must have customers that bring in other business, or incur enough fees to cover the maintenance and servicing expenses on the account. These types of accounts used to be subsidized by accounts that generated significant non-interest income such as debit card interchange fees. The Durbin amendment severely alters the non-interest side of income, making free checking a loss leader product, and a burden that community banks will not be able to offset, forcing them to charge for checking.


Hernandez also points out fallout harm to the very businesses the Durbin amendment was intended to protect. A study experts from the University of Chicago Law School, the Brookings Institute and the MIT Sloan School of Management concludes that:

• Small businesses will face higher retail banking fees and the loss of valuable services as banks offset the loss of interchange revenue.
• Because of increases in banking fees, the number of unbanked individuals will increase, with many low-income individuals having to use higher-priced alternative financial service providers, such as check-cashers.
• The small businesses that see an increase in bank fees will not receive offsetting benefit from lower debt card interchange fees because they don't accept debit cards, but . . .
• Large retailers will receive a windfall of $17.2-$19.9 billion dollars in the first 24 months of the proposed rule being in effect.

To read more of Mr. Hernandez's thoughts click here.