Debit cards’ $20B issue Merchants, banks’ bitter DC battle over swipe-fee cuts

The move on Capitol Hill to cut the $20 billion a year in debit-card “swipe fees” charged by banks could come back to bite consumers.

Under a proposal in the new financial reform package being hammered out last night in Washington, the 3 percent fee that banks charge retailers may be halved — but banks might look to make up for the loss by ending free checking for bank customers plus hiking other fees, experts say.

“This is going to squeeze a good revenue stream for banks and financial institutions,” said Greg McBride, senior financial analyst at BankRate.com. “Banks will make up for it by pricing for their services.”

“You’ll see service fees for things that used to be free, such as checking. Rewards programs will also be hurt and we could see new monthly charges for debit cards of around $2 or $3, and probably some new transaction fees of 25 cents apiece.”

Retailers won their makeover with intense lobbying efforts — telling lawmakers that lowering the fee would reduce their costs and allow them to pass that savings onto the customer.

At giant retailers like Wal-Mart and Target, debit-card purchases can make up more than 20 percent of total sales, said industry sources.

The measure to cut swipe card fees does not affect credit cards.

Even before the voting, Congress had side-stepped making a clear-cut decision for the warring parties on exactly how much to cut fees — punting the issue to the Federal Reserve to determine the economics and timing of new debit-card fee cuts.

Retailers normally had been paying between $1 and $3 for every $100 of sales made from debit cards.

Industry sources said the Federal Reserve could wind up slashing fees by as much as one-half, or by just small fractions spread over five years for an orderly transition.

One debit-card issuer, however, won his prize even before Congress sat down to vote.

Hip-hop mogul Russell Simmons successfully lobbied lawmakers to exempt prepaid debit cards from the new regulation.

Simmons owns a pre-paid debit card called a RushCard in a joint venture with a debt collection company. He blogged about his lobbying effort, saying “Democrats, Don’t Do This to the Poor.”

Consumer advocates claim his card hurts the poor. After a customer pays cash for his card, Simmons charges the customer a $3 activation fee, plus $9.95 per month, $2.50 for each ATM withdrawal, $1 for each card transaction, and 50 cents just to check the card’s balance at an ATM, according to the Washington Post.

“That particular card had practically a fee for looking at it,” said Ed Mierzwinski, a consumer official at US PIRG.

Barclays Capital said in a report that “banks will take actions to mitigate the potentially adverse impact [of debit-card reform], including passing along costs to end-users and reducing costs.”

Indeed, the US Government Accountability Office (GAO) said in a recent study on Australia’s pioneering and long-established debit-card system, which made similar swipe-fee cuts in 2000, that merchants rarely ever pass fee savings to consumers, who wind up paying more for debit-card use. paul.tharp@nypost.com