Will the New Debit Card Fee Caps Eliminate Cash Back Debit Cards?

It’s little wonder that people shudder whenever the federal government tries to help them. Often times, the government assistance just makes things worse.

That might be what happens if the government approves new caps on the fees that banks and credit-card companies charge businesses that accept debt-card payments.

You might not know this, but every time you pay for a good or service with your debt card, the provider of that card charges the business an interchange fee. Better known as swipe fees, banks and credit providers charge businesses an average of 44 cents every time they swipe a debit card, according to data released by the Federal Reserve Board.

The problem, in the eyes of Reserve Board members, is that it typically only banks 7 to 12 cents to process debt card transactions. It’s why the Federal Reserve Board, in mid-December, proposed capping debt card swipe fees at 12 cents a transaction.

Savings to Businesses, Trouble for Consumers?

This move, if approved, would save businesses across the country anywhere from $10 billion to $13 billion a year, the Fed says. The hope is that these businesses will pass these savings along to consumers.

The banks and credit-card providers, of course, don’t support this proposal. They say that retailers will be far more likely to keep their savings for themselves, rather than passing them on to consumers. There might be some truth in that: Many businesses are struggling to stay alive in today’s dismal economy. Do you think these retailers will do anything but hoard any savings they can get?

And what about the banks and credit-card companies? Consumer advocates worry that they’ll react to the fee cap by doing anything they can to recoup some of the profits it will cost them. This could mean eliminating such consumer-favored perks as cash back debit cards including Chase Leisure Rewards.

The End of Cash-Back Debit Cards?

The swipe fees largely pay for the rewards programs that credit-card companies and banks offer with their debit cards. If these fees are capped, banks will look for ways in which to save on their expenses. Cutting out cash-back debit cards is one way to do this.

Banks and credit providers are already under stress. Remember the Credit CARD Act of 2009? That piece of legislation placed significant regulations on the way credit providers can operate. Many banks and credit providers are still smarting from that legislation. The fee caps on debit-card transactions would just anger them all over again.

The best advice to consumers? If you are fortunate to have a debit card that provides you with cash-back bonuses, enjoy it while you can. In a recent feature story on this topic, the Huffington Post wrote that the debit caps might as well be a “death watch for debit card rewards.”

If the proposed cap passes, be ready to watch those rewards disappear with even the biggest banks and best credit card companies.