ven though consumers now use their debit cards more often than they use credit cards, the fees charged at the point of sale (POS) remain problematic. It seems that people don't know how much it costs to use a debit card with a personal identification number (PIN) vs. one requiring a signature for authorization.

The Federal Reserve Board presented a report, commissioned earlier in the year by the Senate Committee on Banking, Housing and Urban Affairs, to Congress on Nov. 18, 2004 regarding the disclosure of fees for POS debit transactions. Lawmakers are concerned that as debit use grows, consumers aren't given adequate information on fees charged by banks or at the POS.

According to the Fed's study, the steady growth and economic importance of debit card transactions warrant close examination.

It's estimated that by the end of 2004, U.S. consumers will conduct 18.6 billion debit card transactions, which will comprise 53% of all card-based transactions. One-third of all debit transactions will be secured with a PIN and the remainder will be signature-based.

Members of the Senate committee expressed concern over the fees some banks, savings and loans and credit unions charge when their customers use PIN-based debit cards; these are fees that many consumers might be unaware they're paying.

The Senate committee requested information from the Fed on three specific areas: whether there is adequate consumer notification of debit fees at the POS; whether there is sufficient notification of the fees in consumers' monthly bank statements; and whether the amounts, sources and recipients of those fees are clearly accounted for monthly and annually.

To complete the report, the Fed surveyed 800 depository institutions (banks, etc.) and 1,500 consumers.

The study also incorporated information gathered from more than 120 responses to a notice published in the "Federal Register," the official daily publication for rules, proposed rules and notices of Federal agencies and organizations, as well as executive orders and other presidential documents.

These responses came from the public and members of the payments industry including financial institutions, processors, networks, reserve banks and merchants. The study identified four main areas of concern: the prevalence of PIN debit fees; how well banks and other financial institutions comply with current disclosure requirements; the adequacy of existing disclosures and the benefits and costs of implementing new requirements; and the feasibility of developing a real-time disclosure standard.

The report's findings concluded:

• Large institutions are more likely than smaller ones to charge PIN debit fees; roughly 14% of institutions that offer debit cards charge fees for PIN-based transactions. A small fraction of customers is charged a fee for signature-based debit transactions.
• In the past year, about 15% of all customers with debit cards had accounts that were subject to PIN fees; many institutions do not impose fees on all of their customers' accounts.
• Regulatory compliance data indicate that more than 95% of depository institutions satisfy all current regulatory requirements for any electronic funds transfers and an even higher percentage satisfy the specific POS debit fee disclosure requirements.
• Consumers and merchants said debit fee information provided in initial and change-in-terms statements is of limited value. Improvements to the periodic statements regarding fee disclosure would be a low-cost way to upgrade information and consumer understanding.
• Real-time disclosure of debit fees at the POS terminal would greatly improve consumers' awareness of the fees; however, this solution would involve the most extensive changes to the payments infrastructure and involve the highest costs.

The 54-page report covers industry basics including how debit transactions are processed, interchange rates and provides background analysis on topics including the costs to merchants of debit acceptance, compliance and consumer perception issues.

The Fed's report to the Senate Committee on Banking, Housing and Urban Affairs on debit fees is available online in its entirety at www.federalreserve.gov/boarddocs/rptcongress/posdebit2004.pdf .