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Banks still dependent on debit

By Claes Bell, CFA · Bankrate.com
Tuesday, November 8, 2011
Posted: 3 pm ET

Despite all the carping from banks over the swipe fee limits imposed by the Durbin Amendment, debit cards remain an important profit center for the industry. From Kate Fitzgerald at American Banker:

Even with reduced revenues, debit still drives profits, Scott Qualls, senior vice president with BB&T Corp., told attendees.

"We focus on the overall value equation, and our experience is that versus (the customer) who writes checks, the debit card user tends to have a totally different profile and is a much more profitable customer," he said.

I think the risk of losing profitable debit card users, more than any public relations black eye, was behind big banks backing off of debit card fees last week. When debit card fees started popping up en masse, a lot of people were advancing the theory that banks were trying to kill off debit cards in favor of more profitable credit cards.

But I think it's more likely banks just thought people would grumble a little bit but pay the debit-card fees anyway, just as they had with every other checking account fee they'd levied in the past. Instead, debit card users rebelled and began flooding into credit unions and community banks, and the big banks caved.

Looking at the big picture, debit cards just have too many advantages for banks to ignore. Not only are debit card transactions cheaper to process than checks, but because debit transactions are funded from users' checking accounts, banks can collect their swipe fees without having to worry about risking their own money as they do with credit cards.

That last part is especially important right now; the trend toward easing credit card lending standards appears to have slowed, according to the latest survey of senior loan officers by the Federal Reserve. Many banks, wary of a double-dip recession, are refusing to open the credit card spigot any further, keeping some consumers locked out of the market for credit cards.

I think it's important for debit card users to remember all this next time they're feeling abused by their banks. Sure, their checking account probably isn't worth as much to their bank as it used to be, but it's still pretty valuable, and that gives debit card users some leverage.

What do you think? Do debit card users have leverage over their banks? Or can banks afford to cut debit card users loose?

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