What if the best checking account wasn't a checking account at all? Seems crazy, but that's how things are looking as the October 1 implementation of the Federal Reserve's cap on interchange fees draws ever closer.
With the authority granted to it by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Protection Act, the Federal Reserve finally ruled in July that banks could no longer charge merchants more than 24 cents per debit card transaction that takes place in their store. According to a Card Hub study, this could cost major banks $9.4 billion in revenue annually.
Worsening Checking Account Landscape
I say "could cost" instead of "will cost" because there are ways around these losses for the banks with at least $10 billion in assets to which this legislation pertains. In fact, heavy hitters like Wells Fargo, Chase, SunTrust, Bank of America and Regions Bank have already eliminated their debit card rewards programs and/or started experimenting with new fees for debit card use.
Things Looking Up for Prepaid Cards
The opposite is and will continue to prove true with prepaid cards. One of the most notable loopholes of the Durbin Amendment is the exclusion of prepaid cards. Banks can still charge whatever they want in prepaid card interchange fees and are therefore likely to make these cards much more attractive relative to debit cards tied to checking accounts. Simply put, banks will make more money off these products and will therefore be able to sweeten the pot for consumers with rewards and low fees as a result.
Now, you might be wondering why exactly you should care about the rise of prepaid cards. After all, they're just for people who can't qualify for checking accounts, right?
Not exactly. Prepaid cards were once the logical choice for those who could not open a checking account as a result of previous misuse (e.g. numerous bounced checks, unpaid overdraft balances, etc.) simply because they provide the same services as a checking account/debit card combo, minus the checkbook.
Now, prepaid cards are the logical choice to supplant traditional checking accounts and play a central role in people's day-to-day finances both because of their similarities to checking accounts and because their unregulated interchange fees will enable banks to make them more appealing financially.
Prepaid Card Fees
"What about prepaid card fees?" you might ask. After all, if you've ever used or shopped for a prepaid card, you likely know that they can have different fees for every little thing you might use them for, from withdrawing money at an ATM to checking your account balance. Well, as it turns out, you've just got to find the right one. According to Card Hub's recent prepaid card report, a prepaid card can actually serve as a free checking account, if used correctly. And industry experts expect more streamlined offers in the near future, which will specifically target customers who already have checking accounts, but are looking for cheaper alternatives.
While you may still be happy with your checking account and may not have incurred additional fees or seen your debit card rewards discontinued as result of the Durbin Amendment, it's still important to be aware of major industry trends such as these. You could, after all, soon feel the effects of debit card interchange fee regulation. Or perhaps you'll wonder why banks are all of a sudden making such a big deal out of prepaid cards. And now you'll know.