Will debit fees drive credit card spending?
October 12, 2011
Bank of America's announcement that it would start charging customers a $5-a-month fee for using their debit cards has raised the question of how credit card spending will be affected. In light of the new debit fees, will customers start go back to cash again or will they switch to using credit cards?
Some have speculated that banks and credit card companies employed the new debit card fees as a way to coax customers into using their credit cards more. Although the debit card "swipe fees" that banks and card processors collect from retailers have been cut in half by recent regulations, credit card interchange fees remain untouched. So while the hefty profits from debit cards are diminished, the prospects for continued profits from credit card purchases are good--at least for now.
Retail takes aim at credit cards
The retail industry has made it no secret that they want credit card interchange fees to be capped in the same way debit card fees are.
This year the Federal Reserve capped debit card swipe fees at about half of the average 44 cents-per-transaction rate banks previously charged. Although the cap was twice what was originally proposed, the move is nevertheless expected to save retailers--and cost banks and credit card companies--$6 billion to $8 billion a year.
Now retailers have their sights set on reducing the $30 billion a year they pay in credit card swipe fees.
"Swipe-fee reform is a two-part job, and we are only halfway done," David French of the National Retail Federation said recently.
Will customers benefit?
It's still not clear whether consumers will benefit at all from caps on debit card or credit card swipe fees. Retailers have yet to reveal what they'll do with the billions they'll save every year--except to suggest they might be able to lower prices or hire more people, though whether that will happen on a large scale remains to be seen.
Meanwhile, consumers are stuck with some potentially costly choices: paying debit card fees to their bank, using their credit cards more and facing higher interest payments, or lugging around a checkbook or a cash-stuffed wallet. Since free debit card transactions have become a way of life for many, these may all seem like poor options.
Also, low- and middle-income customers could be hurt the most by the new fees since they are less likely to have a credit card application approved or to be able to maintain the minimum balances required to avoid checking account fees.
Credit card companies on a roll
One thing is certain: credit card companies are doing great. Despite a sluggish economy, Visa's earnings have jumped 40 percent, Discover's profit has doubled and MasterCard and American Express both recently saw profits climb more than 30 percent, according to the Wall Street Journal.
Investors have noticed and have pushed the stocks of MasterCard and Visa, which process card transactions but do not loan money, by as much as 40 percent. Investors have noted that consumers continue to purchase things with plastic, and that the credit card industry has not been exposed to the uncertainty of the weak housing market and euro-zone travails.
Investors are also enthusiastic about the credit card companies that do the actual lending to consumers. These companies have written off many delinquent accounts in recent months and have improved customer credit quality by being more selective about which credit card applications they approve.