Why Would Banks Cap Debit Card Transactions?

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There’s been talk of big banks such as JPMorgan Chase changing their policies to cap debit card transactions at $50 or $100. Do you know why?

My first thought is that they want people to use their credit cards more, but I was wrong.

Each time we make a debit transaction, the bank changes the retailer an ‘interchange fee,’ which averages at 44 cents. These interchange fees help offset money lost from fraudulent transactions.

Each year, those small fees add up to about $16 billion, so in it’s not chump change even though each transaction is small.

As part of the financial overhaul legislation that was passed last year, these interchange fees are being reduced, and under the current proposal by the Federal Reserve, interchange fees would be capped at 12 cents per transaction.

Chase alone is projected to lose more than $1 billion a year because of the change. Other banks are also predicting big losses.

This story is not simply about big banks not making as much money. They are trying to recoup costs of fraudulent transactions, and there are two ways of maintaining a balance between fees they collect and fees they have to pay due to fraud.

The first is by charging enough on each transaction to cover the fees. Based on the new legislation, however, it won’t be enough.

So banks are considering trying to reduce the amount of fraud by limiting the limit each fraudulent charge could possibly cost.

Instead of $1,000 in fraud on a transaction, if the limit were $50 or $100, there just wouldn’t be as much fraud and the banks wouldn’t have to pay out more than they take in from interchange fees.

Readers, do you think reducing interchange fees would be a good thing? Would putting a limit on debit card transactions affect the way you shop?

11 Responses to Why Would Banks Cap Debit Card Transactions?

  1. This legislation pisses me off. I’m doing a video on it tonight and will have it posted tomorrow. I don’t think the government has any business getting involved in this stuff.

    I don’t blame the banks for wanting to cap debit card purchases. If the limit is $0.12 per transaction for the banks, then the banks have to pay for what it costs to actually process the transaction, so let’s call it $0.10 profit (just a random guess). Now pretend they don’t have a limit on transactions and there is a $1,000 fraudulent charge. The bank will need 10,000 non-fraudulent charges just to break even on that one bad one.

    This legislation does nothing to help the consumer, and I hate it.

    • Daniel says:

      @Kevin McKee, Agreed, it’s masked as helping small businesses (I think), but really the fees will come from somewhere else, most likely to be in the form of fees on each account. As long as there’s a clear link between the money they bring in from interchange fees and the amount they pay out due to fraud, I’m ok with the ‘high’ fees.

  2. Ravi Gupta says:

    I agree with you guys that I don’t like government interfeering with the banks nor do I want the banks interfeering with the government (another issue). I feel that this will help small business but at the same time punish the banks. Personally I would love to pay for everything in cash, sadly many large retailers offer no discount for cash.

    -Ravi G.

  3. Jacque says:

    A limit on the amount of debit card transactions would definitely change the way I shop. A $50 limit on debit card purchases would mean that I couldn’t even buy a tank of gas with my debit card, let alone what it would do for grocery shopping. Its frustrating that fraud has to affect our purchases this way.

    Another thing about this that bothers me is the idea that the “big banks” can afford it. That’s ridiculous, they will just pass that on to consumers in some way, in addition to making it less convenient to shop. At the end of the day “big business” is made up of individual people and serves individual people, so penalizing them or trying to control their fees or profits just passes through to all of us.

    • Daniel says:

      @Jacque, It seems that more and more, we’ll be charged fees on everything. Remember when peanuts and bags used to be free on airplanes? Seems like a long time ago, right?

      Maybe in 10 years, we’ll think about that on bank fees. Who knows?

  4. I’m still torn on this issue. I’ve been charged interchange fees before (as in not had the bank pay them) and they blow. It was a percent of the transaction, but why should I have to pay for them to process my payment method? If they dont want my money, they should let me know and i’ll take it to someone who does.
    On the other hand, I dont use my debit card (ever) and only have a checking account to pay auto-withdrawn bills from.
    so it wont affect me at all, and my credit cards come with freq flyer miles.

    • Jeff D. says:

      @Jeff @ Sustainable life blog,

      The reason you have to pay merchant fees is because it is the bank’s equipmnet, and technology you are using to process the guaranteed form of payment. you could accept only checks and cash, then you would be stuck with the chance someone’s check was bad. Also the cost of debit card fraud to the banks is over $8 billion a year, plus the expenses of detection technology, fraud support staff, public education, etc. the interchange fees help the banks recoup those losses.

  5. krantcents says:

    No because I do not use a debit card. I am concerned with the bank changing their fee schedule. I expect sooner or later banks will get around to the other services and raise those fees. It has not affected me yet, but I think it is a matter of time!

    • Daniel says:

      @krantcents, Agreed, but will banks really be willing to be the first to do it? If my bank charged me fees, I’d leave for a fee-free bank in an instant!

      With online banks not charging fees (I assume they will be the last to charge), and technology constantly improving (will be able to deposit checks online soon for more banks), going to an online-only bank will become more of a realistic option.

  6. Everyday Tips says:

    I rarely use my debit card, so I guess it won’t affect me. I hate big banks though, and I figure they will find a way to recoup their losses and consumers will pay for it.

  7. commoncents says:

    This has nothing to do with fraud and everything to do with making people go back to credit cards! The credit card mafias have hated debit cards since day one and the banks don’t care for them either. Your being sold a load of bs about fraud! With the new CC rules the banksters got passed and the private Fed Res overseeing these charges now all they have to do is drop the fees on debit cards transactions. Then “make” the banks lose money,(sobbing), and run debit card users back to CC’s. Thereby recouping all of the “lost” money in whopping INTEREST on the CREDIT CARDS!
    CHASE Freedom my friends!

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