How Strict Limits on Debit-Card Fees Created More Free Checking

The financial crisis wrought changes to all corners of consumer finance, reshaping everything from mortgages to credit cards and debit cards as new laws came into force and shifted markets. Five years after the crash, researchers finally have enough data to begin to understand the scope of intended and unintended changes introduced by the reforms.

One recent paper found that the 2009 CARD Act, which banned such profitable credit-card practices as increasing interest rates with minimal notice, has saved consumers $20.8 billion annually, although banks note that the change has also constricted access to credit. Now a new analysis from the Federal Reserve Bank of Kansas City finds that caps on swipe fees for debits cards have, almost counter-intuitively, given consumers more access to free checking accounts.

Before the Durbin amendment to the Dodd-Frank financial overhaul bill, banks had been charging retailers an average of about 43¢ per swipe in exchange for processing debit transactions. The new law ordered regulators to impose limits. In June 2011, after a year of wrangling, the Fed cut those fees in half, capping the charges at an average of 24¢ a swipe.

Richard Sullivan, a senior researcher at the Kansas City Fed, looked into how this changed the types of checking accounts offered to consumers in order to determine whether, as is reasonable to expect, banks cut back on free checking to make up for having lost the benefit of $8 billion in yearly swipe fees. Sullivan found that this did happen—but only at large banks. From 2011 to 2012, the share of large banks offering free checking fell almost in half, to 27 percent.

But small banks with assets under $10 billion are exempt from the law, and the share of small banks offering free checking rose from 37 percent to 44 percent in the same period. Because there are so many more small banks than large ones, this shift more than offset the decreases at big banks.

Overall, Sullivan found that the volume of consumer accounts at banks that offered free checking rose from 19.4 percent in 2011 to 21.6 percent in 2012. Put another way: Consumers overall now have more access to free checking. He also found that small banks cut back on the number of strings they attached to eligibility for free checking, such as requiring minimum balances. Big banks, on the other hand, increased such strings on their free checking accounts.

The fiercebattle over swipe fees isn’t over. This summer, a court ruled that the Federal Reserve should have made the cap even lower. While the Fed appeals the ruling, the 24¢ cap stands. Retailers, meanwhile, have already rushed to claim that the new findings bolster their argument that trimming the fees could save consumers, not just retailers, money—even if those savings come at the local bank, not at the cash register.

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