A rule change being considered by the Federal Reserve Board could have a big effect on banking services millions of us use every day, and on whether low-income Americans are able to access those services. It's important that the Fed approach this decision in a way that protects consumers.
The proposed rule, based on a provision in the Dodd-Frank financial reform law, would sharply limit what are known as interchange fees, the fees that banks and other card issuers collect from merchants whenever you swipe a debit card to pay for a purchase. The proposed rule would limit such fees to 12 cents per transaction. The banking industry has been sounding the alarm, saying the loss of over $11 billion in revenue from these fees will force them to charge customers more -- eliminating free checking accounts, raising minimum balance requirements, etc.
An industry press release argued that, should the rule go ahead as now drafted, "Through higher fees to own and use debit cards, fewer benefits and less convenience, America's consumers will foot the bill for giant retailers."
If the banking industry is right, this is serious. If basic banking services get more expensive, lots of people may conclude they can no longer afford a bank account, and that would have significant consequences.
Millions of American households already lack bank accounts, relying instead on alternative - and often pricier -- financial services like payday loans, check cashing services, refund anticipation loans, and money orders. People of color and those with limited means are disproportionately represented in this group: A whopping 53.3 percent of African American households, 43.3 percent of Latino households, and 44.5 percent of Native American households are either unbanked or underbanked (meaning that they have a bank account, but still depend heavily on alternative services). Households with incomes under $30,000 account for at least 71 percent of unbanked households.
Increased account fees or minimum balance requirements could drive many more out of the banking system. But are such increases necessary? And if interchange fees are slashed, will merchants pass along their greatly reduced costs to customers?
In official comments filed Feb. 22, The Greenlining Institute is urging the Fed to take a thorough look at these issues. In our comments, we noted that there are reasons to be skeptical of some claims now being made: "Free and or low-cost checking did indeed exist in the United States prior to the recent spike in interchange fees in past years, and exists in other countries where interchange fees are capped. Those behind this argument must be asked by the Federal Reserve to demonstrate why basic, affordable checking and savings services would be singled-out to make up for lost revenue from a cap on interchange fees."
It may be that there is good reason to allow swipe fees higher than what is currently on the table, but if so, there should be concrete benefits for consumers. If it decides to allow higher fees, the Fed should require a guarantee of free checking and savings accounts for low- and moderate-income consumers, which are not now guaranteed even with very high current interchange fees.
Hardworking members of our communities and their children are at a severe disadvantage as they attempt to climb their way out of poverty, and at the root of this disadvantage is a lack of access to traditional banking products and services. The Fed should use the current debate as an opportunity to put in place a series of remedies that would ensure continued and enhanced access to safe, affordable, basic banking products and services.