Checking on Debit Reform

MPC: K.C. Fed report shows consumers now have more choices for free checking

Published in CSP Daily News

Kansas City Federal Reserve K.C. Fed

WASHINGTON -- A new report from the Kansas City Federal Reserve shows that debit swipe fee reforms have benefitted consumers with options for free checking increasing since the reforms went into effect, said the Merchants Payments Coalition (MPC).

Debit swipe-fee reform, passed by Congress in 2010, required the Fed to ensure that the fees charged to merchants that accept debit cards, be "reasonable and proportionate" to the cost of the transaction. The law exempted 99% of all banks and applied only to those banks with more than $10 billion in assets. In 2011, the Fed imposed rules that capped debit swipe fees for nonexempt institutions at approximately 24 cents.

The analysis, conducted by economists with the Kansas City Federal Reserve, reviewed checking fees before and after debit reform at samples of both large and small banks. Regulations limiting debit swipe fees that went into effect in Oct. 2011 only apply to banks with more than $10 billion in assets; smaller banks are exempt from the regulations.

The report finds that while some large nonexempt banks eliminated free checking, a greater number of smaller, exempt banks maintained or increased free checking options. The result, according to the Kansas City Federal Reserve, is that "for an average consumer, free checking became more available after interchange fee regulation."

MPC highlighted additional parts of the report:

  • "This article examines broad samples of regulated and exempt banks, compares their fee structures before and after the imposition of debit card regulations, and finds that--on net--consumers actually had increased access to free checking after the debit-card regulations went into effect in late 2011."
  • "On balance, more exempt banks reduced fees, more than offsetting the impact of regulated banks' raising of fees. On net, the change resulted in increased availability of free checking accounts."
  • "The footprint of banks offering free accounts rose from 19.4% of all checking account balances in 2011 to 21.6% in 2012. Elimination of free checking accounts at larger, regulated banks was more than offset by an increase in free checking accounts at smaller, exempt banks."
  • "Thus, consumers' net increase in access to free checking stemmed mainly from the greater availability of free checking at exempt banks. At some banks, both regulated and exempt, there were also other changes in the terms of the checking accounts offered to consumers. This article finds evidence that access to free checking has expanded most in cities and regions where banks are engaged in vigorous competition: banks in such markets may offer free checking to attract customers from other banks or to ensure retention of their own established customers."

"This important study puts to rest the myth that big banks used to complain about reform limiting their ability to fix prices. The bottom line is that consumers win and competition is strengthened when debit fees are reduced," said Doug Kantor, counsel to the MPC.

Bolstering the evidence that debit reforms benefit consumers, an economic study conducted by economist Robert Shapiro recently found that reducing the cost for merchants to swipe debit cards put $5.8 billion back into the hands of consumers through lower prices in 2012 alone, which led to sufficient increased spending to support 37,501 new jobs. These annual consumer savings and jobs will improve the U.S. economy for years to come due to swipe fee reform, according to MPC.

The MPC is a group of retailers, supermarkets, drug stores, convenience stores, fuel stations, on-line merchants and other businesses who are fighting against unfair credit-card fees and fighting for a more competitive and transparent card system that works better for consumers and merchants alike. The coalition's member associations collectively represent about 2.7 million stores with approximately 50 million employees.