New regulations reducing debit card interchange fees are causing some banks to charge customers more for using debit cards, which could drive consumers to increase their use of credit cards, according to a new research paper from the Federal Reserve Bank of Boston.
Although banks typically do not charge debit cardholders explicit fees, it is "feasible" they may begin to do so or add per-transaction charges to compensate for lost interchange revenue, Joanna Stavins, a senior economist and policy adviser at the Federal Reserve Bank of Boston, wrote in the report entitled "Potential Effects of an Increase in Debit Card Fees."
The Federal Reserve on July 29 approved rules limiting the fees that merchants pay larger banks when their customers make purchases with debit cards. In most cases, the fees will drop to about 21 to 24 cents per debit transaction from the current average of 44 cents. Issuers with less than $10 billion in assets are exempt.
Large banks are already charging customers more for using their checking accounts or related debit cards, in a bid to make up for their lost debit card revenue. Wells Fargo & Co., for example, is testing a $3 monthly fee for customers who use their debit card.
Consumers' perceptions of debit cards as relatively low-cost payment instruments likely will change if issuers begin to charge customers to have a debit card and apply fees when they use it, Stavins wrote.
Some consumers might avoid using debit cards entirely if banks apply fees to them, but the most significant shift would involve consumers who routinely use debit cards switching to rewards-based credit cards that carry no annual fee, Stavins concluded.
"Consumers who (in a 2009 Fed survey) viewed the cost of debit as high relative to the cost of credit cards had a significantly higher share of credit card transactions," Stavins wrote.
So "it is reasonable to expect that an increase in the cost of debit (cards and the charges applied when they are used) would lead to an increase in the use of credit cards," she wrote.
Issuers already are beginning to encourage more credit card use through debit card policy changes resulting from the new Fed rule. Starting Nov. 16, brokerage clients no longer will earn rewards when using Bank of America Corp.'s Merrill Lynch deferred debit card, which links to a customer's brokerage account and deducts funds for transactions at the end of each month. The bank is urging customers who wish to continue to earn rewards to apply for a Visa-branded credit card.