50 years from now, we may all be sitting around the porch reminiscing how back in the old days, you could use a debit card for free. Bank of America has announced a $5 monthly fee for using your debit card for purchases. Meanwhile, Wells Fargo is testing a $3 fee and SunTrust has already implemented a $5 fee. It seems this trend may soon become an industry norm, but why are banks charging fees for debit cards?
Frank – Dodd Legislation
Any plastic you use for payment, whether a credit card or debit card, charges a fee to the retailer that you are purchasing from. America charged the highest debit transaction rate, averaging about $.44 a transaction. Traditionally, retailers passed these fees onto the consumers, but with inflation of prices on many retail goods like clothing, merchants were afraid that consumers had reached the tipping point.
Enter financial regulation reform and the Frank-Dodd bill. Part of the massive reform bill was to set a ceiling on these transaction fees in the name of lowering the cost of retail goods to the consumer. According to the NY Times, transaction fees were lowered by 50 percent from $.44 to $.24. The intent of the bill was to try and shift costs of transactions from
consumers to banks. Retailers and consumers could then share the benefits of lower retail prices.
What Went Wrong
While 20 cents a transaction looks minuscule, it does add up. Research from the Boston Consulting Group estimated losses of around $25 billion to the banking industry. I think we can all agree that this is a sizable hit to the banking industry’s paycheck. When anyone takes a pay cut, they go looking for ways to make more money. The monthly debit card fee is born in 2011.
Are Banks or Retailers Evil?
Good idea? Bad idea? I’m not one to start moralizing the pricing strategies of companies (Netflix included). Bad business decisions are repaid in kind with bad patronage. However, I’m sure the rationale in the banking industry went something like “retailers were passing these costs onto the consumers, why can’t we?”
It should also be noted that surveys show it is highly unlikely retailers will pass debit card transaction savings onto consumers.
It’s Far From Over
However, regardless of where you want to point the finger, I don’t think debit card fees will stay with us. First of all, as Beating Broke pointed out, consumers don’t need to put up with debit card bank fees:
Eventually, as the regulation piles up,and it becomes harder and harder for the banks to make any money on credit and debit cards, they’ll find more and more ways to fee us for those services and others. As the fees increase, more and more of us will revert to using cash as a medium of exchange. And the more of us who are using cash, the less of us are using those services which means they’ll have a smaller income on those services and will need to squeeze more fees out of the users.
A rise in the price at the register from retailers is far less conspicuous than a debit card fee. It’s never wise to try and pass on fees to customers who have easy access to free substitutions. I have doubts that banks will be able to pass these fees onto consumers without repercussions.
However, there is more to consider. These fees are only the first to hit consumers in the wake of financial reform. The Frank-Dodd legislation did far more tinkering to how the finance industry works than debit card transaction fees. For example, there are proposed premiums to pay if you can’t put 20 percent down on a mortgage.
Many of the changes from Frank-Dodd have yet to make their way to Main Street; only then will we know whether
consumers will bear the brunt of the cost for increased financial regulation.
Read more about Debit Card Fees and How to Deal with them:
- Frugal Dad: What
Durbin’s Amendment Means for Your Debit Card Use
- One Cent at a Time: 9
Steps to Switch Your Bank Account
- The Simple Dollar: Some Thoughts on Bank of America’s
Debit Card Fee Plan
- Mortgage Free By 30: Why Bank of America’s Debit Card
Fee Doesn’t Bother Me
- Personal Finance Whiz: Everyone is Wrong About Bank of
America’s Debit Card Fee
- Credit Karma: The $5 Debit Card Fee: You Talk
the Talk, But Will You Walk the Walk?
- The Millionaire Nurse: Debit Cards Doomed? Swipe Fees