credit & debt

Time to Switch to a Small Bank?

You many find more perks at community banks and credit unions because they're exempt from a new ruling on debit-card fees.

The Federal Reserve cut a little slack for banks June 30.

Earlier this year, the Federal Reserve Board proposed capping the fee that banks charge merchants every time a customer uses a debit card. Banks now charge an average of 44 cents per transaction. But the Fed's proposal would limit the fee to 12 cents starting July 21. Some large banks quickly responded to the proposal by eliminating debit-card rewards -- a preemptive move to compensate for the potential loss of revenue from debit fees -- and threatening to cap debit purchases at $50 to $100.

But when the board met June 30 to issue a final ruling, it set the debit-card fee at 21 cents and 0.05% of the transaction and pushed the enactment date back to October 1. Although the fee cap now is almost twice as high as the proposed 12-cent limit, banks still stand to lose $9.4 billion in revenue generated by debit-card fees, says Odysseas Papadimitriou, CEO of CardHub.com. As a result, large banks will continue to look for ways to make up for lost revenue.

However, small banks are exempt from the ruling. Because the new cap won't apply to fees they charge on debit transactions, small banks will be less likely to eliminate debit-card rewards or other perks they offer, Papadimitriou says. Some may even offer more competitive checking-account products than what large banks offer -- especially considering that many large banks have eliminated free checking and increased fees.

Already you can find higher-yielding accounts at some small banks than at large ones (see Find Higher Rates for Your Savings). For help comparing your options if you want to switch financial institutions, see How to Find a Local Bank.

Prepaid cards also are exempt from the ruling. So Papadimitriou expects large banks to create more prepaid products and encourage customers to switch to them from debit cards. Prepaid cards typically come with a slew of fees, including activation and monthly fees and occasionally transaction fees.

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