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BofA to charge for debit cards

By Claes Bell, CFA · Bankrate.com
Thursday, September 29, 2011
Posted: 3 pm ET

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?

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27 Comments
MikeFl
October 03, 2011 at 3:40 pm

I was just about to open a new account at BofA, but this fee will make me reconsider. Banks vs, credit unions has been a common discussion, but I am very opposed to paying transaction fees to get back my own money! I will drive miles to get to my own bank's ATM to avoid a fee, so I will not do business with a bank that charges this type of fee.

Joan
October 02, 2011 at 7:08 am

Bank of America is a waste of a bank and I think they are doing this to get back the money they lost when they issued credit cards to illegal aliens. I stopped using them when they did that and would never use them again, if I had to put my money under the mattress. Shame on Bank of America (ie-Mexico)

TAYLOR28031
September 30, 2011 at 6:33 pm

What about people like me who are on disability? $60/yr is a lot, after paying for many RX's,Insulin,and other medical supplies, there's barely much left for basic survival needs. I use debit because it's safer than carrying cash. We little fish are paying for the greed of banks,lending co, traders and others with money control. This country is crumbling because of "AMERICAN GREED." I need to find a Credit Union and transfer all my info. That's going to be time consuming and exhausting. I'm disappointed with BofA.

Mitze
September 30, 2011 at 2:50 pm

So done with commercial banks! Leaving Suntrust immediately as they are no longer offering free checking and I refuse to pay a fee to use my debit card. How dare the banks try to force consumers to use credit cards as an alternative. The only way to get out of debt and stay out is to go cash only and the debit card gives you that option. Pentagon Federal Credit Union now has my banking business. Might as well start stuffing money under your mattress again if the banks want to start nickel and diming you to death!

JEN
September 30, 2011 at 2:15 pm

I wouldn't mind paying a one time monthly fee only if I do a purchase transaction. I think $5 is too high though even for unlimited transactions. I will go back to writing a check at the register. If the fee is $1 or $2 then I would do it.

Claes Bell
September 30, 2011 at 10:15 am

Look for a credit union, community bank or online bank. A lot of people are eligible for credit unions without knowing it. With the huge number of banks available in the metro NYC area, you should have no trouble.

Claes Bell
September 30, 2011 at 10:12 am

Yep, if you use a debit card for either a PIN or a sign-and-swipe purchase, you'd be incurring a fee.

ngan
September 30, 2011 at 10:11 am

Question about debit card fee...when i do a purchase using my bank card, a few times, the merchant would ask me debit or credit? If I say credit and therefore do not enter in a pin, will i still be charged the $5 fee?

Paula
September 30, 2011 at 9:39 am

Credit unions are the way to go.

Wolverine
September 30, 2011 at 9:31 am

Cash will be king again... for those who can't afford the type of account at BoA that gives you a free debit card.

Anyone who pays $5 just to use their debit card is the kind of idiot that BoA is targeting. And trust me, MANY won't even realize they are paying a fee until many months later, if at all.

Oh, America...

I just think that if BoA is going to make it that transparent, at least bring back the debit card rewards. Give something back... oh wait... this is BoA we're speaking of. What a joke of a bank.