Most consumers probably think of the death of debit card fees as an unadulterated good, but it may have some negative consequences for CD investors hoping to find decent CD rates at large national banks. Dan Geller of Market Rates Insight has a piece in BAI Banking Strategies this month arguing for reducing deposit rates as a way for banks to cut costs and avoid having to raise fees on checking customers:
The introduction of the $5 debit card fee and its subsequent withdrawal can teach us two lessons: one, consumers are very sensitive to any additional banking fees, and two, there are more productive ways to improve the bottom line through a reduction in interest expense.
Banks can generate nearly double the potential $875 million in monthly debit card fees just by lowering their deposit rates by as little as 0.01 percent a month.
Will customers react to a slight decrease in deposit rates as they did in the debit fee controversy? Not likely.
I think Geller's got a point here. If you're a bank, and you have a choice between dropping CD yields 2 basis points and getting basically no market reaction, or instituting a new debit card fee that's going to spawn a huge amount of negative publicity and a mass transfer of customers to credit unions, I think it's obvious the former is probably the better choice.
That being said, CD rates at the major national banks are so low at this point that they're going to run out of room to cut them pretty quickly. For instance, at Wells Fargo, the standard CD rate for a 1-year CD is currently .05 percent. A couple of rate cuts to try to boost Wells Fargo's profitability, and they'd be bumping up against the zero bound. Geller's strategy may work now, but what about in 2012 or 2013, when CD rates have endured another year or two of grinding down?
What do you think? Is it smarter for banks to lower costs by reducing CD rates, rather than imposing new fees?