Debit Fees: Someone Has to Pay the Piper

Like airplane meals and the Wall Street Journal online, banking services just couldn't remain free forever.

When Bank of America slapped the $5 fee on debit cards, consumers, politicians, and President Obama himself cried foul. However, someone had to pay the piper, and in this case, it's Bank of America with a $60 annual ultimatum for customers to bank or walk.

Who's to blame here? The retailers who called for the Durbin Amendment, the legislators who enacted it or the banks who are reacting to it? Let's start from the beginning.

Retailers, particularly big box retailers like Wal-Mart and Home Depot, lobbied for a cap on interchange fees for debit transactions and blamed money-gouging bank practices. In support, legislators capped interchange fees from 44 cents to 24 cents. With Capitol Hill already divisive over financial regulations, many politicians, consumers, and retailers alike didn't bat an eye at cutting into bank profits.

And like the interest rate hikes, account closings and rewards program reductions that followed the CARD Act, unintended consequences followed.

Banks had an estimated $7-8 billion in revenue losses from the Durbin Amendment to make up for, so consumers were hit with debit card fees. Spreading costs across existing customers is simply easier than finding ways to recoup money from merchants. Nowadays, merchants can walk away from banks and seek alternatives like Paypal, mobile wallets, and other emerging mobile payment technologies. Banks are counting that customers won't walk, at least not in significant numbers.

So where do we stand now? Banks were squeezed by legislation, so banks turned around and squeezed consumers and break even. And retailers can thank the banks for $7-8 billion in profit, and laugh while consumers pay $7-8 billion in fees.

The savings from the Durbin Amendment should've been passed down to consumers, so let me know if your milk and eggs are a few pennies cheaper.

The lesson here is that there is no free ride, not after years of bad banking practices, lack of regulation and consumer protections, and our own financial excesses (pre-Recession, many of us bought homes we couldn't afford and accrued debt we couldn't pay back).

Banking services, as we knew them back then, can't remain free forever. Banks are seeing their profit margins squeezed, and unless you're a profitable customer with higher balances or multiple financial products at the same bank, banks will profit from you the old-fashioned way: by charging you.

Let's take the interchange fee, which essentially cut about 20 cents of profit for every debit card transaction. If you are a typical debit user racking up 25 transactions a month, multiple that by the 20 cent difference, and it adds up to exactly $5.00. It's the price of doing business, first charged to merchants, then passed on to banks, and now charged to consumers.

As Rick Newman of U.S. World News and Reports points out,

"Those years of free checking and other small perks trained many consumers to think of basic banking services as a birthright -- which they're not. No matter how unpopular they may be, banks offer services with genuine value, such as convenience and security. Yes, it's your money they're holding, but there's still a cost to the services they provide."

Which is why banking is evolving. As big banks go through growing pains, smaller financial players, like credit unions and online banks, have business models that allows them to offer free checking and increase debit rewards (instead of fees). There's prime opportunity for these alternatives to steal some customers and put real pressure on big banks.

There will be consumers who choose to stay with their big bank. After all, their mortgage, auto loan, and savings are there, and they've already set up their billpay and direct deposits. These services have a sticky element, and will make it more painful for consumers to switch banks than pay five bucks. It's just the price of doing business.

They'll be the ones willing to pay the piper. And rest of us will vote with our feet and take our money elsewhere.


Justine Rivero is the Credit Advisor for CreditKarma.com, the pro-consumer credit advocate that helps more than 3 million consumers realize the everyday cost savings of having great credit health.

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