Issuers Eyeing Fees for Debit Can Expect Cardholder Backlash, Survey Shows

Some 49% of debit card holders would either stop using their cards or use them less often if their issuers slapped a $1-to-$2 monthly fee on their checking accounts in return for unlimited usage, and another 25% would close their accounts altogether, according to consumer research released this week. Only 26% would continue using their cards as usual, according to the survey by processor Total System Services Inc. and Mercator Advisory Group.

Consumer reaction to a transaction fee is even more severe, with 65% saying they would either stop using their cards or use them less often in response to a nickel-to-a-dime fee per payment. One-fifth say they’d close their accounts, and just 15% would go on using their cards as usual.

These results come just days before the Federal Reserve is set to hold a meeting on June 29 to air its final rule implementing the Durbin Amendment’s debit card restrictions. Earlier this month, a move by Durbin’s opponents to delay the law’s July effective date failed in the U.S. Senate. The law, an amendment to last summer’s Dodd-Frank Act, caps debit card interchange for issuers with more than $10 billion in assets and places other restrictions on the cards. The Fed’s first proposal, released in December, placed a 12-cent limit on the interchange issuers could earn, down from a 44-cent average.

That limit, which stunned industry observers, has led many issuers to reconsider cardholder pricing and rewards offers as they look at ways to compensate for the draconian interchange cut. The research report released this week, which presents the results of an online survey of 1,000 debit card users, does not mention Durbin explicitly but was undertaken as a way of gauging consumer reaction to various pricing scenarios issuers might adopt, says Sarah Hartman, senior director for payment solutions at TSYS. “We’ve been talking to a lot of existing clients as well as prospects over the last five or six months over changes they’re considering,” she says.

Hartman cautions that the group surveyed were “heavy debit users,” or enthusiasts who might be expected to react negatively to various fee scenarios. Still, issuers considering transaction limits rather than explicit fees might also have cause to be concerned, according to the survey. Some 61% said they’d stop using their cards or use them less often if issuers imposed a dollar limit, such as $50 per transaction; nearly a third—29%–said they’d close their accounts, the strongest such reaction of the scenarios surveyed. If issuers imposed a cap on the number of times cardholders could use their cards each month before paying a fee, 20 times for example, 55% would stop using their cards or use them less often, while 16% would close their accounts.

Scenarios in which banks slapped on fees but merchants offered rewards leave consumers less sure of their reactions. In a case where the issuer charged a dime per transaction but the store offered a 10% discount, some 32% said they’re not sure how they’d react. Thirty-nine percent would use their card, while 29% would not.

Issuers cutting back on debit rewards may face a backlash, as well. About half of respondents said they’d “miss” the perks, though only 28% of them reported having rewards on their cards currently. Among those who said they’d miss their rewards, 47% said they’d start using another payment method. Still, not all cardholders with rewards cards perceive value in the perks. “It takes a lot more to redeem rewards from a debit card than from a credit card,” Hartman points out, especially if the offers aren’t also tied into other bank products such as online bill pay.

The alternative payment method most often mentioned by those who said they’d stop using their cards or use them less often was cash, cited by 53%. Twenty-six percent cited checks, while 24% preferred credit or charge cards and 21% said they’d turn to PayPal.

The survey also asked about new debit-related technologies and services. Those gathering more than a 50% positive response were instant-issue cards (56%) and secure PIN entry for online transactions (54%).

Some 48% of respondents use their debit cards at least 10 times a month, with only 3% reporting no usage at all. More than half—58%–were customers of large national banks, the type most likely to be affected by the Durbin Amendment.