It's another rough day for banking. The Federal Reserve today announced a proposal to drastically cut debit card interchange fees. The news is especially bad for the two major debit card providers, Visa and MasterCard, which saw their stock prices sink this afternoon. And banks will also be hit, since they are traditionally passed on a cut of these fees. How drastic is the Fed's new rule, and how would it change the industry?
Peter Eichenbaum and Carter Dougherty at Bloomberg provide a good explanation of how the fees will change:
The new rules, posted today by the Fed on its website, may aid retailers and cut profit for lenders who reaped about $15 billion from such charges last year. Terms outlined by the Fed include a plan with caps of 12 cents per transaction. The fees currently average about 1 percent.
This is huge. If they were 1% before, this essentially sets the limit at what they collected for a transaction equal to $12. Any larger transactions would have collected more profit in interchange fees, but will not going forward. The Bloomberg article continues:
The result could be an 80 percent to 90 percent drop in the fees that Visa and MasterCard pass on to banks, according to Tien-tsin Huang, an analyst at JPMorgan Chase & Co. Jason Kupferberg, an analyst at UBS AG, said investors had been expecting a 40 percent to 60 percent reduction.
So investors were bracing themselves for an impact of merely half what the Fed announced. A little quick math from the information above implies that the loss in profit could be between $12 billion and $14 billion.
Banks won't simply shrug and consider this money lost. Instead, they'll have to re-work their strategy to get this money in other ways. Such changes could potentially include checking account maintenance fees, ATM fees, or even a per transaction fee directly for customers. Banks might also attempt to herd customers towards credit cards instead of debit cards, since they can still collect big interchange fees on credit transactions, as the new rule would only apply to debit cards.
Of course, consumers ultimately pay these fees now -- they just don't realize it. They are baked into the prices of the goods and services they use their cards to buy, passed on by retailers. So as banks shift the fees into other aspects of their business, all that will really change is how the revenue is collected. But regulators likely prefer this outcome. The banking experience would be more consumer friendly if the costs associated with services are more transparent and direct.