Senate Signs Debit Card Death Certificate

06/21/2011 01:39 pm ET | Updated Aug 21, 2011

The momentum that had been building toward postponing the Federal Reserve's ability to set the debit card swipe fees that merchants pay to banks came to a grinding halt almost a week ago when a large-bank-led initiative fell six votes shy of passing through the Senate. Now that the Fed's announced plan to reduce these fees from their current average of 44 cents per transaction to 12 cents remains set to take effect July 21, we can expect a number of changes that will affect merchants, consumers and banking professionals alike. But exactly how will these changes manifest themselves, and what do they really mean for our day-to-day lives?

The first and most obvious implication of the impending limit on debit card interchange fees is the significant revenue reduction for the affected banks -- those with at least $10 billion in revenue. These banks, according to a Card Hub study, stand to lose about $14 billion annually after the law takes effect.

This fact will lead to a number of important shifts within the personal finance industry. In response to less debit card revenue, banks have started increasing checking account fees and minimum balance requirements while also decreasing or eliminating debit card rewards. Banks -- continuing a trend kicked off recently by Capital One and American Express -- will also begin offering prepaid cards and eventually start pushing consumers to use them as replacements for their checking accounts.

In addition, an increasing portion of consumers will either gravitate toward more attractive small-bank debit cards offerings, which are unregulated, or will stop using debit cards altogether in favor of rewards credit cards.

As a result of the aforementioned market forces, merchants will encounter fewer and fewer interchange-regulated cards and won't actually end up saving much. Banks will also simply make their money in a slightly different way, while the plastic we use to make purchases will be less debit-oriented and more of the rewards-credit-card and prepaid-card varieties.

While it appears as if a moratorium is no longer in the cards, changes are needed if consumers are truly to benefit. It's difficult to create true competition when regulations have such a limited scope and are so rigidly applied. If, however, merchants are given the freedom to offer discounts or apply surcharges based on the type of payment vehicle being used and its payment network, true competition would develop, leading to lower prices. For example, if a merchant can charge a certain amount for a product when a consumer uses a Visa card to pay for it, more when an American Express credit card is used and less with a MasterCard debit card, then interchange fees and prices would surely drop.

Odysseas Papadimitriou founded Card Hub, the leading marketplace for credit card deals.