One provision of the financial reform legislation passed last year by Congress requires the Federal Reserve to issue rules that place reasonable limits on debit card fees. Commonly known as Interchange Fees or Swipe Fees, these small fees are what banks and credit unions charge merchants for processing each and every use of your debit card. Merchants pay the fee, but often pass on these fees to consumers as a cost of doing business. Of course, banks and credit unions that issue debit cards have come to rely on swipe fees as a healthy profit center.

In December, the Federal Reserve proposed capping fees at 12 cents per transaction, down from an average of 44 cents. While such a drastic cut in debit card interchange fees should be welcome news for consumers, the truth is consumers will never see a penny of that savings! In fact, consumers will most likely end up paying more money to their banks and credit unions because financial institutions will have to make up for that lost revenue somehow, someway.

The Interchange Fees issue is one more example of how Congress – while well-intentioned – has turned lemonade into lemons! Nobody wins. Banks and credit unions, which rarely agree on anything, are aligned against the Fed proposal to lower fees because they will take a direct hit in terms of lost revenue. On the other hand, merchants can't wait for the Fed's gift, which according to economic experts, will result in a $12 Billion savings for Main Street. And, as usual, consumers get the short-end of the stick because merchants are not required to pass on any debit card fee reductions to us. To make matters worse, consumers face the possibility of losing their free checking accounts and seeing lower deposits rates by banks and credit unions. This issue could also trigger tighter credit rules being introduced by banks and credit unions to protect them from further credit defaults by consumers.

In the final analysis, the Interchange Fees (Swipe Fees) issue is a hot potato that will not only burn the Federal Reserve, but also banks, credit unions and America's consumers. We think the Fed should drop it until things cool down and a more rational solution is found.

About the Author:

Tom Hinton is president of the American Consumer Council, a non-profit consumer education organization with 111,000 members. He is also a popular business author and speaker who frequently contributes articles on consumer issues and business excellence. He can be reached at tom@americanconsumercouncil.org