Debit cards, a gleam in bankers' eyes 30 years ago, have become the preferred method for people to tap their bank accounts, a free and easy alternative to paper checks, live tellers or cash machines.
U.S. shoppers used them 37 billion times last year, making them more popular than credit cards (19 billion transactions) and checks (18 billion), according to the payments newsletter Nilson Report. Another estimate puts the figure at 45 billion debits.
But big changes are afoot that could make it much more expensive for consumers to use the cards. And with concern rising over data breaches, some privacy advocates are recommending that shoppers return to cash or use credit cards, which provide better protection against fraud losses.
For years, banks subsidized most debit card holders by levying heavy fees on retailers and overdrawn consumers. Merchants paid a processing fee averaging 44 cents every time a shopper swiped a card. And careless cardholders at major banks typically got dinged $35 every time the bank covered an overdraft.
For The Record
Los Angeles Times Wednesday, June 29, 2011 Home Edition Main News Part A Page 4 News Desk 2 inches; 71 words Type of Material: Correction
Debit card fees: An article in the June 25 Business section about changes in bank policies governing debit cards said Bank of America no longer processes debits in the order of largest to smallest. In fact, it does reorder transactions so the largest is paid first on certain types of account withdrawals, including automated debits to pay recurring bills. It declines one-time debit-card purchases if the transaction would overdraw the account.
Last year the nation's banks collected more than $50 billion from merchant fees and overdrafts, including checking and ATM balance-busters as well as debit card transactions.
That's likely to decline, however, thanks to new rules Congress mandated after the financial crisis. Starting next month, merchants will pay just 12 cents for debit processing, unless bank lobbyists persuade the Federal Reserve to tack on a surcharge for fraud prevention. Even then, the fee would probably not exceed 18 or 20 cents.
In addition, new rules that took effect last year prohibit banks from automatically charging consumers for debit card and ATM overdraft protection on everyday transactions; instead, cardholders now must opt in.
The bottom line is that banks stand to lose more than $10 billion a year in merchant fees and more than $6 billion in overdraft fees. They'll be looking to make it up somewhere -- and it's likely to be from the mainstream debit card users, not just the sloppy ones.
Already, JPMorgan Chase & Co., Wells Fargo & Co. and many other banks are reducing or phasing out rewards programs that gave users cash back for using debit cards. Chase has been testing a monthly $3 fee for debit cards in some states, and Bank of America Corp. and Citigroup Inc. have added new fees to some checking accounts.
At least one credit union has capped debit purchases at $300 a day, and most of the nation's 7,534 banks and thrifts are testing or plan to test consumer reaction to new fees or limits on debit cards or the checking accounts to which they're linked, said Richard Hunt, president of the Consumer Bankers Assn.
"They're all testing the market and seeking the right price," Hunt said. "It's a mathematical certainty the consumer will bear the cost."
Industry consultant Michael Moebs predicted that the typical cost to consumers might approximate a Sam's Club or Costco membership, about $36 a year on average.
Consumer advocates are steamed. Electronic debits are much less expensive to process than checks or cash; banks have saved billions in operating costs, said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. But the industry has largely pocketed those savings rather than pass them along to customers, he said, and now they're looking to charge users for the convenience.
"We were trained to use cards, and now they're telling us it's not enough, wanting to charge us for the privilege," Mierzwinski said. "It's diabolical."
It's not the first time activists have complained about banks' debit card practices. In the past, financial institutions made piles of money by reordering customer debits so the largest transactions cleared first.
For example, if a customer had $100 in a checking account and made three $10 debit purchases early in the day and a final one for $200, the bank would process the $200 transaction first, then the smaller ones. The result: $140 in overdraft fees as opposed to $35 if the transactions had been processed in order.
Facing numerous lawsuits, most banks, including Wells, Chase and BofA, have abandoned the high-to-low sorting of debits (although those three still process checks that way).
Citigroup., whose Citibank never routinely offered overdraft protection on debits, has said that next month it will begin sorting checks starting with the smallest amounts first.
Seeking to get ahead of the new rules, Bank of America stopped offering its customers debit overdraft protection last year.
And in a national class-action suit over reordered debits, BofA has agreed to pay $410 million to benefit customers who paid overdraft fees starting in 2001. The settlement, approved May 24 by a Miami federal judge, was the first by more than 40 bank defendants in the case, including Chase and Wells.