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Debit fee limit for banks could kill rewards, free checking

By Claes Bell · Bankrate.com
Thursday, December 30, 2010
Posted: 6 am ET

The Fed recently proposed new limits on how much banks can charge merchants for debit card transactions, which could be the final nail in the coffin for debit card rewards and free checking accounts. The rules would limit banks with assets over $10 billion to a flat, 12 cent fee per transaction, an amount closer to what it costs the banks to process a debit card transaction than current fees, according to the Fed.

That limit would force banks to take a big hit, because they could no longer charge higher fees based on the size of the purchase and the payment method. Currently, the average fee for a swipe-and-sign debit transaction is 44 cents, or 1.14 percent of the transaction amount; the average fee for a PIN debit transaction is 23 cents, or .56 percent of the total. A flat-fee limit of 12 cents a transaction would translate to a roughly 70 percent cut in revenue for the banks on most transactions.

And that will no doubt add up to billions in lost revenue for the affected banks. The Associated Press has a recent article on how KeyCorp, a regional bank based in Cleveland, Ohio, stands to lose $100 million from the fee limits, and they're nowhere close to as big as giants like Bank of America and Wells Fargo. Worse still for the banks, this move comes on the heels of new federal rules restricting overdraft fees, another plum source of revenue.

For consumers, it's hard to imagine these rules won't end up pushing fees on their checking accounts higher and eroding what's left of the debit card rewards programs out there. Regulators hope those fees will be offset by lower prices for consumer goods in stores, as retailers no longer have to build the cost of interchange fees into their products.

I'm torn on this question. Having grown up in the age of free checking, I hate paying checking account fees. But if there's one thing American retailers, especially the big-box variety, are good at, it's cutting prices as far as they can go. If this change means I'll pay less for everything, including groceries, etc., it may offset the pain of seeing that account maintenance fee on my monthly statement will cause.

What do you think? Do lower prices outweigh checking account fees for you, or would you rather stick with the status quo?

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