Banking UP

The Federal Reserve today issued the final rules on the Durbin Amendment, and it’s an ultimate win for retailers, although I predict some battles to come from the banking industry and consumers before the dust settles.

The Amendment, part of the sweeping Dodd-Frank financial overhaul legislation, allows the Federal Reserve to put limits on the interchange fees that merchants pay banks when you swipe your debit card at their cash registers.

Today, those fees are ranging between 1% and 2% of the amount you purchase and have added up to $16.2 billion that merchants paid in 2010. As of October 1, 2011, the planned effective date for the new rule, those fees will be a maximum of 21 cents plus 0.05%, nearly 48% percent lower than before for a typical transaction of $40.

Lower fees sound like a good thing, assuming the savings are passed on to consumers and assuming that the banks can still afford to run the networks that make debit cards work safely and reliably.

If they can’t, consumers will see new fees tacked on to their bank debit cards and will respond by moving to lower fee alternatives. That, in turn, will prompt the banks to innovate their financial products while being mindful of not letting hidden fees get out of hand, for fear of sparking the regulatory backlash cycle all over again. And in the end, I predict consumers will gain fair, simpler, more transparent banking options, and retailers won’t be left holding the bill. But it will take a few tries to get there.

For background on hidden interchange fees, read Why You Should Care About Hidden Interchange Fees in 2011

For the details of today’s ruling, read the Fed memo posted by PYMNTS.com

Disclosure: Plastyc, a company that offers prepaid card services (prepaid cards are a sub-category of debit cards)is not directly affected by the proposed interchange rules, which only apply to prepaid card issuers with assets of $10 billion or more.

During tough economic times, many of us can get dangerously close to the bottom of our checking accounts several times a year. As checks may not clear in the order we write them, sometimes our balance will even go negative by accident.  This is the dreaded overdraft.

Many years ago, banks invented a curious form of protection against overdrafts: you are permitted to overdraft, so that you don’t get embarrassed by a bounced check or a decline of your debit card in the shop, but you are charged a fee for this tolerance. The overdraft protection fee punishes you for having gone negative on your balance, while you find some money to get back into positive territory.

In all fairness, banks are giving you a temporary credit while your balance is negative and they deserve to be compensated for it. But $38 Billion during a single year? That’s $126 for every single of the 300 Million Americans, including newborns and the millions without a bank account.

According to economic research firm Moebs Services, here are the yearly revenues from overdraft fees collected by US banks since 2005:

In 2010, under congressional and public pressure, banks and credit unions started changing the terms of checking accounts to ask for voluntary opt-in to overdraft protections instead of making it a systematic feature. That year, revenues from overdraft fees fell slightly back to their 2008 level.

In 2011, they are resuming their steady rise.

Not all of us overdraft our accounts. But those who do, tend to do it repeatedly. You don’t want to be part of the club of “frequent overdrafters”; this dubious distinction is costing hundreds of dollars per year.

Unfortunately, the people hurt the most by these fees are the ones who can least afford them.

The Consumer Finance Protection Bureau, which starts operating this summer, will certainly try to protect you against these overdraft protection fees and other abusive clauses hidden in bank disclosure statements that average 111 pages in length according to a report by the Pew Charitable Trust.
This is quite a long shot though. With steadily increasing revenues in the tens of billions, banks will not be tamed easily.

So, what are you to do to protect yourself? Oddly enough, don’t opt for overdraft protection: this is when the fees kick in. You could choose prepaid accounts that cannot overdraft and never charge an overdraft fee. Some of us in the financial industry are adhering to these simple “do no harm” rules, but we obviously need to do a better job of making our products known.

On December 16, the Board of Governors of the Federal Reserve System met and proposed a way to implement the debit card interchange fee and routing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Board has requested comment before February 22, 2011, on their proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

Here is a copy of the comment I have sent to the Board:

Secretary,
Board of Governors of the Federal Reserve System,
20^th Street and Constitution Avenue NW
Washington DC 20551

RE: Comments to Docket 1404 – Debit Card Interchange Fee and Routing

I am the CEO of Plastyc Inc., a company devoted to delivering  financial services to the tens of millions of under-banked Americans.
We provide re-loadable prepaid card services in partnership with banks with less than $10B in assets.

Therefore, we are not impacted by the proposed regulations and can comment with the benefit of a position of neutrality.

We are particularly concerned by the un-intended negative consequences which are likely to impact the un-banked, under-banked and low income Americans. Below is a summary of such concerns, and suggestions on how to address them:

I remain at your disposal for any further input you may require.
Very Respectfully Yours,

Patrice Peyret

On December 16, 2010, The Federal Reserve Board proposed a new rule that would lower by as much as 84 percent the $16.2 billion in fees that merchants pay annually when you swipe your debit card at their cash registers. (The Fed asked for public comments on the proposal by February 22, 2011.)The idea is that merchants will save money and pass along savings to you.

Immediately, large U.S. banks and credit card issuers attacked the proposed rules as a threat to their industry, a handout to merchants who get out of paying their fair share of money network costs, and a booby-prize for consumers who gain no assurance of savings but almost surely would face higher banking fees.

See “Debit Card Fee Cap Could Mean Higher Prices for Consumers”

Behind the proposed new rules and the arguments against them are some key questions:

• Why should you care?
• What are the real costs?
• Who should pay?

Read the complete article in the Huffington Post

Banks deserve to be protected… Banks are consumers: they consume our life-spendings when we don’t read the fine-print.

Stephen Colbert interviewing Barney Frank

The Colbert Report Mon – Thurs 11:30pm / 10:30c Consumer Protection Agency – Barney Frank