Debit card spending limit? Banks consider a $50 cap
Blake Ellis, staff reporter, On Thursday March 10, 2011, 9:34 pm EST
http://finance.yahoo.com/news/Debit-card-spending-limit-cnnm-3728211539.html?x=0
Declined! Your debit card may soon be denied for purchases greater than $100 --
or even as little as $50.
JPMorgan Chase, one of the nation's largest banks, is considering capping debit
card transactions at either $50 or $100, according to a source with knowledge
of the proposal. And the cap would apply even if you run your debit card as
credit.
Why? Because of a tricky thing called interchange fees.
Right now, every time you swipe your debit card your bank charges the retailer
an average fee of 44 cents, which it shares with its partners. Those little
fees, however, add up to about $16 billion per year, according to 2009 data
from the Federal Reserve.
But as part of the Wall Street reform legislation that was passed last year,
these fees are being slashed. The Fed is currently proposing rules that would
go into effect in July and would cap interchange fees at 12 cents.
That's a big enough cut to cost Chase more than $1 billion a year. And Chase
may not be alone. Other major issuers are also projecting huge losses from the
interchange fee cap.
Joe Price, president of consumer banking for Bank of America, said in an
e-mailed statement that the lower fee wouldn't fairly compensate the bank for
the infrastructure and services it provides to retailers.
And consumers would end up feeling the pain when Bank of America is forced to
recoup costs "by increasing the cost of their everyday debit card transactions,
limiting their payment choices, and impacting industry innovation," according
to the email.
Aside from mulling over a limit on transaction amounts, Chase is already
testing $3 monthly fees on debit cards and $15 fees on checking accounts in
certain states. Additionally, the bank announced in November that it has
stopped issuing debit rewards cards.
A Chase spokesman declined comment on this story.
The revenue banks get from interchange fees helps to offset money lost from
fraudulent transactions. So with the Fed's proposed cap in place, banks argue
they won't have the money to protect themselves against fraud. And, of course,
the bigger the purchase the bigger the risk, so banks are considering limiting
consumers' ability to pay by debit card.
"If banks cannot recapture their fraud-prevention costs, it is likely that a
lower percentage of transactions at the point of sale would be approved," Price
said. "If the final rules that are issued in April look like the draft, there's
no question that it will impact how we and other issuers price deposit and
payment services and what features and benefits are included."
But a Bank of America spokesman declined to comment on whether the bank would
cap debit card purchases at $50 or $100.
Representatives from Wells Fargo and HSBC declined to comment on their plans,
while a spokeswoman from Citi said the bank isn't making any changes at this
time.
If a cap like this does make its way into accounts across the board, consumers
would be forced to write checks, withdraw cash from ATMs, or put their spending
on credit cards.
"The whole model on the debit card side is in flux because of Dodd-Frank," said
Brian Riley, senior research director at financial services consulting firm
TowerGroup. "The unfortunate thing is that the people who will really get hurt
on this are the people who need the most help."
Many consumers with bad credit aren't able to qualify for credit cards -- and
when they do, it's often with hefty rates and fees. Additionally, ATMs
typically only dole out a limited amount of money at a time and checking
accounts are being loaded with fees.
At the same time, even the customers who do qualify for credit cards are being
punished for having tarnished credit. Bank of America, for example, announced a
$59 annual fee last month for its riskiest customers -- making up about 5% of
consumer credit card accounts.
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