Debit Card Fee: Helping or Hurting BofA?


“Breaking Barriers” is a weekly blog post by Good-b Economist Sterling Wong

You know something has captured the imagination of the public when it trends on Twitter. And for good or bad (well, mostly bad), Bank of America is a big trending topic lately. Twitter users are voicing their frustration and displeasure over the bank’s plan to charge a monthly $5 fee when customers use their debit cards.

Bank of America is not the only one planning to charge for debit card use, with Wells Fargo and Chase also ‘testing’ $3 monthly debit card fees and regional banks, like SunTrust and Regions Financial, will also start charging soon as well. But as America’s largest bank by deposits and the first to officially announce these charges, Bank of America has become the sole target of consumer outrage. It’s undoubtedly the firm’s PR nightmare come to life.

The reason Bank of America and others are introducing these monthly debit card usage charges is, of course, to make up for lost revenues when the Durbin rule, included in the Dodd-Frank financial reform regulations, comes into effect Saturday.

Previously, banks levied a fee of 44 cents on merchants every time a consumer pays with a debit card. Under the new rule banks can charge only up to a maximum of about 24 cents, which means banks will lose about $6.6 billion a year in revenue, as the New York Times states.

So to make up for this massive loss in revenue, Bank of America and others to come will pass the cost from merchants to customers.

No one is happy when faced with having to pay for something that was previously free. The outrage over online pay walls for the New York Times, for example, is testament to that. But is Bank of America justified in raising this new cost for customers?

The monthly charge, Bank of America will argue, is aimed at covering the risk of fraud, operational costs of maintaining the debit card system and other overheads. As NerdWallet accounts, the 44-cent swipe fee became a source of high profit revenue to banks because merchants lacked negotiating power. And in turn, the banks use the profits to subsidize premium services like free checking accounts and surcharge-free ATMs. Of course, some banks are still going ahead with the scrapping of premium services because they assert that the revenue generated from the new monthly debit card use charge is not enough to make up for the loss in swipe fees and that other incoming regulatory measures, like higher capital requirements, will mean they need to be especially careful with the consistency of their profit margins.

When Senator Durbin proposed his amendment to limit the interchange fee on merchants for debit card usage, his stated intention was to help merchants and consumers. Merchants, especially small ones, can save on these costs and pass some of the savings down to customers.

But as is often the case, good intentions don’t always make good policies. First of all, merchants won’t necessarily pass cost savings down to consumers. Fed Chairman Ben Bernanke said that while it is likely retailers in competitive, low-margin sectors will lower prices, those in less competitive fields might simply pocket the savings.

And as for merchants themselves, big box retailers, who lobbied hard for the inclusion of this amendment will benefit, but small businesses will not, because unlike big retailers, they do not have interchange-plus pricing. Instead, most merchants have tiered pricing plans, which means debit card processors can charge extra fees without offering transparency.

In fact, one big culprit of debit card fees is the Visa-MasterCard duopoly in debit and credit card processing. The two companies, which get a cut of every interchange fee, can essentially set the swipe fee for merchants, because they have no competition. While the Durbin amendment seeks to correct this market failure by limiting the fee banks can charge merchants, it doesn’t change the fact that the two companies dominate the market.

The bottom line is there are costs involved in maintaining and running the debit card network, so it was never really “free.” If  Bank of America can’t pass costs to merchants, then it will pass them off to customers. As a publicly-listed company, it is bound to protect its profits to keep shareholders happy (and remember that shareholders aren’t just wealthy people, but institutions too).

So what’s a beleaguered Bank of America debit card user to do? Kathy Kristof at Money Watch offers some suggestions. If banks can circumvent legislation meant to aid consumers, then you can simply vote with your feet. Exercise the (admittedly) little power you have as a consumer and leave the big banks and migrate to an online bank, a community bank or a credit union. Check out the Move Your Money project, which provides information and resources on how to switch to a local bank or credit union.

If Bank of America lives and dies by the sword of shareholder confidence, then perhaps the swift backlash over its action, the bank’s plunging stock on Friday, will compel the bank to take action. Eliminating the new debit card charge and  accepting a lower profit margin is one way to keep market share and maintain profits through good will to customers.

About Sterling Wong

Sterling is a New York City transplant from Singapore who studied economics and politics at Sarah Lawrence and Oxford. Having been exposed to both heterodox, liberal economics and orthodox classical economics, he is most fascinated by the differing perspectives each school of thought offers. At Good-b, he aims to explore these two contrasting outlooks on business issues, in particular the Chinese relationship with the U.S.

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