There's been a meme bouncing around the Web that new debit card fees riling up bank customers are a sign that big banks are trying to kill debit cards. I've seen that argument being made by a number of writers, including Maria Aspan of American Banker and more recently by Herb Weisbaum of MSNBC. Here's Weisbaum:
Debit cards are no longer the darling of the banking industry. That’s because new federal rules limit the "swipe fee" big banks are paid when you use their card. This could lower industrywide revenue from debit cards by billions of dollars a year.
One way some banks hope to get that money back is to charge their debit card customers a monthly fee. Another is to boost credit card use.
"We really think banks are hoping that the alternative people choose in place of the debit card is a credit card," says Bill Hardekopf, CEO of lowcards.com. "Why? Because banks make a lot more money every time we use a credit card than when we use a debit card."
I agree that it looks like banks are trying to encourage credit card use, and why not? Banks are currently sitting on billions in cash, and they're having trouble earning money with those deposits because businesses and consumers they'd normally lend them to are trying their best to get rid of debt.
Encouraging credit card use helps banks put that huge pile of money to work generating interest and fees, and that helps boost bank earnings. And for what it's worth, I think some people will follow the rewards programs and lower pricing banks are offering and start using credit cards as their main form of payment.
But I don't agree that banks have the ability to or even want to phase out debit cards for customers. Debit cards and credit cards may look the same and work the same way at the point of sale, but they aren't equivalent. Debit cards are substitute for cash; credit cards aren't.
That distinction is important for a number of reasons. First off, there's the reality that millions of Americans are locked out of credit cards because of their low credit scores.
But more fundamentally, we're living in a time of deep consumer pessimism. Bankrate's September Financial Security Index found 40 percent of Americans had cut back spending in response to chaos in the financial markets; more than a third said they were worse off financially than a year ago, and 2010 wasn't exactly a banner year for the U.S. economy.
Fed data shows consumer debt outstanding shrunk for the first time since the early '90s, starting in 2008, falling about $200 billion between early 2008 and mid-2010, and only recently started rising again.
The bottom line is that a lot of consumers are looking to cut down on their credit card and other debt to prepare for an uncertain financial future. To some of them, using a credit card as their main method of payment is going to feel like taking a step in the wrong direction.
It would be a little bit like if automakers found out that selling motorcycles was more profitable than selling cars because of new government regulations. Sure, they'd send out more marketing material for motorcycles and try to get people to adopt them. They'd maybe jack up the price of cars to get some people to consider motorcycles instead. But they'd remain fully aware motorcycles aren't cars -- they're much less safe and can only hold one person -- and so they wouldn't plan to phase cars out, because motorcycles could never really replace cars.
I don't think banks or the payment networks expect people to give up the budgeting, pay-as-you-go benefits of debit cards over a $5 a month fee. On a Visa earnings call the other day, Visa Chairman and CEO had this to say:
I don't believe that anything that's happening is going to substantially alter the macro debit volume in the United States. I don't think it's going to go away. Even the one fee that has been specifically announced is a flat fee. It doesn't make any difference.
Instead, I think the gamble banks are making is that customer inertia will triumph and the vast majority of customers will just allow the fee to be drawn out of their accounts. They're also betting that most of the customers who leave over new debit card fees are of the low-net-worth, less profitable variety. Many banks are looking to cut costs by closing branches and laying off personnel, and that's easier if they've thinned out their customer base a little bit.
What's more, the advantages of debit cards from the banks' perspective -- not having to tie up funds in credit card balances that will be paid off without earning interest, not having to be as rigorous about monitoring creditworthiness -- will make debit more attractive again once loan demand recovers and funding becomes more expensive.
What do you think? Are banks looking to end debit? Will you be ditching your debit card and switching to credit?