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The Debit Is in the Details

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Never mind last week's report of a critically stagnant job market, retail stores were expecting a lot of shopping action during yesterday's non-working Labor Day holiday.

That's because back-to-school shopping stretches from July through September, and historically it is the second busiest shopping period, surpassed only by Christmas. Retail stores are hoping for big Labor Day back-to-school shopping sprees.

And if spending trends are to be believed, many of those purchases were made with credit and debit cards. Although consumers, for now, may feel more comfortable in loading up credit card debt to buy needed back-to-school supplies, overall, debit cards are the plastic currency of choice.

Debit card use in the US now exceeds all other forms of non-cash payments, according to a 2010 Federal Reserve payment study. The average household pays about $200 per year on goods because of debit card swipe fees. In 2009, US consumers made nearly 38 billion debit card payments. That's a lot of money.

In August, the Federal Reserve imposed a cap on the fees banks can charge retailers every time customers swipe their debit cards. Banks used to be able to charge an average fee of 44 cents per transaction, now they can charge no more than 21 cents.

Why is that important? In addition to banks, consumers may be the biggest losers in this change. The reason we lose is that by reducing these fees, known as the interchange rate, we are likely to lose the rewards we get when we use debit cards.

"This rate is invisible to most of us, but it is the fuel behind half of the products that we use every day," said Schwark Satyavolu, CEO and co-founder of BillShrink and StatementRewards. "Now, suddenly you take all of that revenue away, and all of those products will suddenly have to go away, as well. What that means is debit rewards will go away," Satayavolu said. "And in some cases, you might even need to pay a fee to use your debit card."

Really? You may need to pay a fee to use your own checking account to make debit card purchases? True to form, banks have stepped in to make debit card fees a reality. Wells Fargo said last month that it will start charging a $3.00 monthly fee for debit card use to customers in Georgia, New Mexico, Nevada and Oregon beginning October 14.

At the end of last year, JPMorgan Chase began a similar test, charging customers in northern Wisconsin a $3.00 fee for using their debit cards. That test continues. Can you see a national trend developing here?

Whether many more banks will impose debit card fees is still unknown. But if most banks do so, will rising fees cause some people to forgo their banking privileges? An Associated Press-GfK poll of 1,001 consumers earlier this year found that 61% of bank customers would stop using debit cards if a $3.00 fee appeared on their account.

Satyavolu believes there could be a fundamental shift in how people even use banks that is driven by such an innocuous thing as changing the interchange rate. "One potential outcome that was not intended is that checking accounts could become expensive and larger numbers of people may become unbanked and move to check cashing services and prepaid cards," he said.

Another consequence could be plummeting card use. "More people may turn to cash, and may not make a purchase if they don't have cash," said Satyavolu. "If that happens, sales could drop and that could cause an economic impact. Plastic is a grease for commerce. So anything that impedes the use of plastic could have a negative economic impact."

So now that you've navigated the retail store crowds and surveyed your holiday bargains, just be aware of how much you may have really spent depending on the plastic payment option you chose.