Banking may never be the same after Oct. 1, as a new federal rule threatens to eliminate free checking and affect the way people use their debit cards.
The new rule slashes in half the amount banks are allowed to collect from merchants for each debit card swipe.
Lost revenue from swipe fees is expected to be made up with a bevy of new fees on card consumers, instead of merchants - who were granted relief by the Federal Reserve under the Dodd-Frank law, experts say.
"A lot of banks currently offer free checking accounts where there are no monthly fees, and that's supplemented because of some of the interchange fees they're able to receive for debit and credit card use," said Jim Ingram, vice president at the Bank of LaFayette in Walker County, Ga. "When that's taken away, they'll have to go back to the service charges on some of the transaction accounts."
Even small banks, which are technically exempt from new rules, will be forced to pass on higher fees charged to them by the financial institutions that run the debit network, according to officials.
Todd Wanner, chief financial officer at First Volunteer Bank in Chattanooga, said most banks are looking at monthly debit card charges ranging from $3 to $5, though some have experimented with much higher fees.
"We'll go from making about $400,000 a year [1 percent of revenue] to losing about $800,000 per year," Wanner said. "I'd have to charge customers about $3.25 [per month] to bring me back to break even."
Regulators mandated a cap on merchant charges of 21 cents per swipe, less than half of what banks typically charge. Banks can charge a little more if they institute fraud protection, but it's still a far cry from the average fee of 44 cents, or about 1 percent of each transaction, that banks charged merchants in the past.
Those fees paid for fraud protection, upkeep on the infrastructure and for new programs that allow consumers to use their card in more ways and in more places, said Trish Wexler, spokeswoman for the Electronics Payments Coalition.
"You have to remember, we've built up a multibillion-dollar infrastructure over 30 years," said Timothy Amos, senior vice president and general counsel for the Tennessee Bankers Association. "About 25,000 financial institutions are connected on one end, and literally a million merchants or more on the other end, so it's a huge infrastructure."
In addition to monthly account fees, regular customers could face higher ATM fees and limits on the size of debit transactions.
Under the debit card regime in place, banks, rather than merchants, are responsible for money lost to fraud. Bank officials say that swipe fees were an important way for them to pay for the expense of fraudulent transaction, so smaller transactions limit their vulnerability.
"It would make sense if they limit the size of each transaction," said Frank Hughes, president and CEO of Cornerstone Community Bank. "That's a sure way to limit fraud exposure."
It's part of the "unintended consequences" of financial reform legislation that was passed in the wake of the country's 2008 financial meltdown, but at this point it's like "closing the barn door after the animals are already gone," said Larry Kuglar, president and CEO of Southcrest Financial Group, a holding company that owns banks in North Georgia.
"When the rulesmakers start applying their interpretation to what Congress intended, that's when we get into a little bit of difficulty," Kuglar said.
In addition to the return of monthly fees, some banks are inventing new fees ranging from a $5 fee on declined purchases to a $3 fee for calling the bank to inquire about an account balance, according to news reports.
Help or Hindrance?
As customers shoulder more of the burden, some groups like the NAACP have spoken out against the effects the law will have on the poor and minorities.
In a letter addressed to U.S. House Speaker John Boehner, the civil rights organization expressed concern that customers seen as low-risk could receive better terms than those considered "risky."
"So-called risky customers tend to reside in historically underserved communities, are already banking at the margins and are much more sensitive to increased costs," wrote Hilary Shelton, director of the NAACP Washington bureau.
Higher fees could drive those customers away from banking altogether, unless they are prepared to jump through a few hoops.
In fact, banks have already laid out a roadmap for how customers can avoid checking account fees, which Wells Fargo started charging in 2010, said Jamie Dexter, a spokeswoman for the bank.
"You can use direct deposit, set up a savings account or maintain a minimum balance," Dexter said, though the bank offers no guarantees it won't change the rules after the regulations take effect.
Customers who set up automatic transfers to a savings account, maintain automatic mortgage payments, or keep more than $1,500 in their account can avoid a $5 monthly fee at Wells Fargo. However, they'll still be on the hook for ATM balance inquiry fees, international transactions fees, overdraft fees and even excess activity fees.
Mike Butler, president and CEO of SunTrust Bank's eastern Tennessee region, said the company added a $7 monthly maintenance fee in June "related to the ongoing transformation of our industry based on various factors," which is eliminated if customers keep more than $500 in their account or use direct deposit.
Clients can also avoid the fee "if they choose not to use their check card for debit transactions during a month," he said.
The Cost of Fraud
Not everything is going to change at once, and many new charges have already been implemented. But depending on the revenue impact, banks may increase or decrease fees in the future, Hughes said.
Hughes said some smaller banks may adopt a "wait and see attitude" to see how the changes will affect their bottom line before they take further measures.
"I think you're going to have a dormant period," Hughes said. "You're going to have a lull while banks wait to see what the impact on their income is going to be."
But without the ability to adjust merchant fees upwards to pay for new services, all future costs for services such as cellphone payment will be charged directly to consumers, Wanner said.
If the network becomes unprofitable to maintain, work on some promising innovations may fall by the wayside, he said.
"I was getting excited about some of the technology coming down the pipe," Wanner said. "Apple was working on an iPhone with a thumbprint that would reduce fraud, Visa was going to send us electronic copies of their receipts via email, but these are technologies that are now potentially on hold."
Even as consumers pony up more of the cost, merchants continue to get the benefit, Wanner argued.
"Back in the day you used to walk in the restaurants and you saw all those bad checks hanging up on the wall, those represented real losses for them," he said. "You don't see that any more with debit cards, because we eat the cost of fraud now."