It looks like charging debit card fees is going to start becoming the norm, at least for large national banks. The Wall Street Journal is reporting today Bank of America will start hitting customers with a $5 a month fee for using a debit card at the beginning of next year:
The fee will apply to customers with various checking accounts during any month they use their debit card to make a purchase. The fee will not apply to customers who do not use their debit card to make a purchase or who only use it to make ATM transactions.
Bank of America is trying to cushion revenue losses it expects to incur from new caps on the fees merchants pay when a customer uses a debit card at their stores. In June, the Federal Reserve Board finalized rules capping such fees at 24 cents per transaction, compared with a current average of 44 cents.
Bank of America has said it expects the caps, which take effect Oct. 1, to erase $2 billion in revenue annually. Industrywide, the caps, which apply to banks with $10 billion and more in assets, could wipe out $6.6 billion in annual revenue for banks, according to an August report from Javelin Strategy and Research.
It's no surprise we're seeing banks floating these plans now. As the WSJ article points out, the Durbin limits on swipe fees take effect on Saturday, and banks are still scrambling for ways to deal with it.
Maria Aspan over at American Banker has a column on the move today, titled "New B of A Fee May Hasten Debit's Demise," which argues this is just the beginning of an industrywide abandonment of debit card payments:
Many consumers prefer to use debit cards to credit cards, and debit became increasingly popular during the recession as consumers cut back on buying all but household necessities.
Some banks, including Wells Fargo & Co., have already started testing fees for customers who pay with their debit cards. But now Bank of America, which does business with one out of every two U.S. households, is killing debit's popularity in one fell swoop.
"Because the bank is so big, other institutions will likely follow suit, so you'll have a part of the population that probably begins to move away from being active debit card users," says Mary Beth Sullivan, managing partner at consultancy Capital Performance Group Inc.
Bank of America is also consciously driving away some customers who cannot afford, or will be alienated by, the new fee.
I think Aspan may be right that BofA has made a calculated decision to let go of a pretty big group of customers who won't pay the $5 debit card fee. But I don't think what we're seeing here is the beginning of the end for debit.
Sure, banks are trying to figure out ways to make debit cards profitable, but it's important to remember that both banks and consumers still have a lot of reasons to like debit cards.
First off, 24 cents -- the new limit for swipe fees -- may not be as much as the 44 cents banks are used to getting, but it's not nothing. I think even at that level, banks will still be making a good bit of money on debit card purchases, particularly considering the swipe-fee hikes on small purchases coming down the pike from Visa and MasterCard.
Debit cards also eliminate several of the risk factors and costs banks have to account for with the other type of card payment, credit cards. When a consumer makes a debit card purchase, they are directly using their own funds. The bank isn't supplying the money itself, and so doesn't have to tie up its own funds or run the risk that it won't be paid back.
And while there's still a risk of fraud losses associated with debit transactions, I think it's likely that fraud losses are lower on debit cards, since a big proportion of debit transactions are made with a PIN, which greatly reduces the risk of fraud. The most recent data I could find comparing credit to debit card fraud losses for issuers came in a 2010 Kansas Fed report, which had annual credit card losses for issuers at $1.24 billion and debit losses at $762 million, a difference of nearly half.
Add to that the fact that banks can hold off paying back customers for fraud losses while they investigate, and debit cards have a lot of appeal for banks, even if they won't make the kind of money for banks credit cards can.
On the consumer side, I don't think people are ready to abandon the combination of pay-as-you-go budgeting with the convenience of plastic that debit cards represent. Debit cards' share of U.S. payments has risen dramatically over the last few years, with a 2010 Fed study finding 35 percent of noncash payments were made via debit, amounting to nearly 40 billion transactions.
I agree with Aspan that a lot of frugal and money-conscious folks will probably either switch to small banks, credit unions and online banks who will keep free checking and debit cards alive, or abandon debit cards altogether.
But it seems likely a lot of people will overlook the fee, or decide they're willing to pay $5 a month to avoid having to carry cash or running up a big credit card balance by accident. I think financial reporters of all stripes overestimate the importance of fees to consumer purchasing decisions in the same way political reporters overestimate the importance of "messaging" to elections.
It's worth noting, too, that for the designers of the Durbin amendment and the changes to regulation E, debit card fees are a feature, not a bug. The whole idea behind these changes was to increase the transparency of the debit-card fee structure. Now, instead of debit card fees being embedded into retail prices and massive overdraft fees levied on consumers, they're right there on monthly banks statements for everyone to see. If nothing else, that should help keep banks' overall debit fees from expanding as quickly as they have in the past, which was what Durbin advocates were hoping for.
What do you think? Is debit on its deathbed? Or will it carry on despite new regulations?