— Debit cards are no longer the darling of the banking industry. That’s because new federal rules limit the “swipe fee” big banks are paid when you use their card. This could lower industrywide revenue from debit cards by billions of dollars a year.
One way some banks hope to get that money back is to charge their debit card customers a monthly fee. Another is to boost credit card use.
“We really think banks are hoping that the alternative people choose in place of the debit card is a credit card,” says Bill Hardekopf, CEO of lowcards.com. “Why? Because banks make a lot more money every time we use a credit card than when we use a debit card.”
Carol Kaplan, senior director of public relations with the American Bankers Association, disagrees. Kaplan tells me she has not seen any evidence that banks are trying to encourage their customers to switch from debit cards to credit cards.
“Banks believe that their customers should have choices — that’s why they offer both credit and debit cards,” Kaplan says. “If banks didn’t want customers to use debit cards, they wouldn’t offer them. Ultimately, customers will drive the market. If they prefer debit cards over credit cards, then banks will continue providing debit cards.”
Those who study the credit card market tell me they believe one reason banks are adding debit card fees is to shift some people back to credit cards.
“Banks are looking in every nook and cranny for revenue raisers,” says Adam Levin, chairman of credit.com. “There’s no question they do well when consumers use credit cards.”
Hardekopf points out that many banks have eliminated debit card reward programs, making them less attractive. At the same time, they have dramatically shifted their advertising mailings from debit cards to reward credit cards.
“One of the things the issuers are doing to further encourage us to use our credit cards is to pay greater and more attractive rewards on their credit cards right now, especially for people who have good or excellent credit,” Hardekopf says.
Why credit cards?
Until now debit cards have been a cash cow. Every time you used the card to buy something, the merchant paid the bank that swipe-fee which averaged 44 cents. Those days are gone. As of October 1, a new rule from the Federal Reserve caps debit card swipe fees at around 24 cents per transaction. According to Bloomberg Government, that could cost the nation’s big banks as much as $8 billion a year.
The new federal regulations only limited the swipe fees on debit cards. Credit cards aren’t affected. The swipe fees paid for credit card use vary from retailer to retailer, but average about 2 percent of the amount charged.
“It’s probably two to three times what the card issuers currently earn on debit cards. So they make much more money right at the point of sale,” says Hardekopf.
And with credit cards, banks also get a second revenue stream: interest.
The more we put on our credit cards, the greater the chance that some months we won’t be able to pay off the bill in full and will get hit with interest charges. According to Bankrate.com, the average credit card interest rate right now is 14.4 percent. Of course, many cards are much higher.
Why not charge it?
There’s nothing wrong with using a credit card, as long as you use it wisely. That means setting aside enough money to pay the bill in full each month so you don’t pay interest and you don’t sink into debt
You also get better fraud protection with credit cards. Federal law limits your responsibility for unauthorized charges to a credit card to $50.
While banks promise “zero liability” for debit card fraud, by law, the extent of your liability depends on how long it takes you to report the fraud. Within two days, your liability is limited to $50. After two days it jumps to $500. And you risk unlimited loss if you fail to report an unauthorized transfer within 60 days.
“Even if the bank agrees with you that the charge is fraudulent, it may take several days to get the money back into your account,” says Credit.com’s Adam Levin. “Money for groceries, rent or a mortgage payment may not be there when you need it. You could wind up paying late fees because of it.”
It’s your money
If your bank is adding fees you don’t like, see if you qualify for a program that gives you free debit card use. Right now, monthly fees have not been added to ATM transactions. You could go back to cash.
Or you can look for another financial institution that fits your needs.
Your best bet may be a credit union. They tend to have fewer fees, lower fees and pay more interest on savings. Making the switch isn’t difficult, it just takes some planning. I wrote about that in last week’s column.
Remember, Bank Transfer Day is Nov. 5.