Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Impact of Debit Card Regulation on Checking Account Fees

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Impact of Debit Card Regulation on Checking Account Fees

Article excerpt

In 2010, when Congress authorized the Federal Reserve to cap the fees paid to banks for debit card transactions, some news reports pre- dicted the banks might react by increasing checking account fees. The cap on debit card fees reduced revenue significantly for some banks, and the concern was that they might seek to offset their losses by raising more revenue from checking accounts. In fact, in recent years, many of the large banks bound by the new debit card regulations have raised their checking account fees. But thousands of smaller banks that were exempted from the regulations have taken varying approaches to check- ing account fees. Some have raised the fees. Others have lowered them.

The net effect on consumers has remained an open question. After the imposition of debit card regulations, have changes in checking ac- count fees benefited or hurt bank customers? What factors drove some banks to change their fees and others not? Were competitive forces im- portant in the banks' decisions?

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 in- creased access to free checking after the debit card regulations went into effect in late 2011. Regulated banks were more likely to raise checking account fees, but exempt banks were more likely to reduce or eliminate fees. 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.

Section I describes the potential for debit card regulations to drive changes in checking account fees and outlines an approach to assess- ing what changes actually occurred-comparing data from before and after the regulations were imposed. Section II examines the changes in checking account fees that have occurred and explores banks' decisions on whether to offer unconditional free accounts or conditional free ac- counts for which customers must meet certain terms and conditions to avoid fees. Section III examines the market characteristics, financial factors, and competitive conditions that may have driven changes in checking account fees.


The changes in checking account fees that took place from 2011 to 2012 came after a decade of striking developments in the debit card market. Debit card use from 2000 to 2009 had soared from 12 percent to 39 percent of all noncash retail transactions, even as the number of those transactions swelled from 72 billion to 104 billion per year (Sul- livan 2012). Over the same period, debit card networks sharply raised the fees charged to merchants for processing transactions. The largest share of these fees, known as "interchange fees," is passed on by the networks to the banks that issue debit cards. Interchange fees increased 33 percent from 2000 to 2011, rising from an average of 36 cents to an average of 48 cents for a $40 transaction.1

Merchants raised concerns about the rise in interchange fees and subsequently, Congress passed the Dodd-Frank Act of 2010, which included a cap on interchange fees.2 The cap took effect in October 2011.3 Congress exempted smaller banks-banks with parent com- panies having less than $10 billion in total assets-from the cap, but larger banks were bound by the cap and experienced immediate losses of revenue. For the regulated banks, the average interchange fee (count- ing fees for transactions of all sizes) quickly dropped from 50 cents to 24 cents per transaction (Hayashi 2012). …

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