Oh, You Wanted a Steering Wheel with that Car? Contemplating New Debit Fees

by Bryan Derman on October 2, 2011

in Bank of America, Banking Industry, Bryan Derman, Debit Cards, Financial Regulators, Point of Sale (POS), Regulatory Environment

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I’ve spent part of my weekend contemplating the public relations hubbub that broke out late last week around Bank of America’s announcement that it would assess a $5 monthly fee on certain of its checking account holders who choose to use their debit cards for point-of-sale purchases.  It’s a polarizing issue.

At one level, I have sympathy for the economic plight of the large retail banks, most of which have taken actions similar to Bank of America’s (albeit at initially more modest fee levels).  The interchange revenue reductions coming to the large banks as a result of the Durbin Amendment are just the latest of several unkind cuts that include reduced overdraft fees and the impact of persistently very low interest rates.

Faced with such pressure, there is a certain logic to the idea of imposing new fees on debit cards, where new regulations have just reduced revenue.  The cards are very popular with many consumers, who may therefore be willing to pay to keep them, while those customers who don’t make debit card purchases won’t be asked to pay new fees.

That all sounds sensible, but I still find myself troubled by this course of action and, somehow, I don’t think this is what I’d be doing, were I still a retail banker.  But why?

Checking accounts have long been a compound product consisting of several components and features (linked accounts, branch locations, online access, telephone service, etc.).  The new debit card fees have the odd effect of attaching a special charge to one particular feature, and it’s one that still generates revenue for the bank from sources other than the account holder.  By contrast, other services that are costly to provide and generate no outside revenue – checks, online payment, on-us ATM transactions – still carry no supplemental charges.

Furthermore, most of those other payment instruments are either fairly stable or even in decline (checks), while debit card usage continues to grow smartly.  Customers who use them must surely see the debit card as the very core of the checking account bundle.  Without the debit card as part of the package, most of these customers would see the product as rather incomplete and lacking critical functionality.  To them, the idea of buying a checking account where the debit card is a feature requiring a supplemental fee must seem like buying a new car from General Motors that considers a steering wheel or tires to be a separately priced option.

It’s already clear that large banks taking this tack have ignited the ire of their customers and the general public.  They may have also left themselves vulnerable to the inevitable marketing entreaties of the thousands of smaller institutions exempted from the Durbin Amendment’s interchange regulations.  What do you think?

5 Responses to “Oh, You Wanted a Steering Wheel with that Car? Contemplating New Debit Fees”

  1. Bryan,

    I too cannot understand why banks are adding fees to debit cards while keeping checks free. It seems like a deliberate political move, trying to put pressure on lawmakers to repeal or amend the Durbin Amendment. I fear it will backfire, however, just as the industry response to the CARD Act fueled the anger that led to the Durbin Amendment.

  2. Bryan, Nice commentary… I think you raise the right points.

    Aaron, It does seem political doesn’t it… ‘see that they made us do!’ But I’m not sure how much credibility banks have right now with consumers. I wouldn’t be surprised if many banked consumers decide that GPR cards are a pretty viable option — plus the point Bryan made about <$10 billion banks.

  3. Nice article. As to why charge for debit cards and not for checks, ePayments and on-us ATM, I think it’s also a matter of chronology. Although their usage is on the rise, debit cards are the newest kid on the block. The older payment methods have been associated with checking accounts far longer and any new charges on them will likely evoke a stronger connection with the steering wheel / tire analogy as compared to levying charges for debit cards.

  4. Peter Braun says:

    If banks want more money from debit, then charging a monthly use fee will not do that and it will instead bring a Netflix-type public relation problem. But I suspect they want to move debit card customers to using credit cards that are much more profitable. The logic is that customers who use checks are less likely to switch to credit cards than customers that are already using one type of plastic (debit cards). Also, checks did not become less profitable, the debit did. This move may neutralize the impact of Durbin on issuers.

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