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Bully for BofA: New Debit Card Fees!

posted by Adam Levitin

Bully for you, Bank of America.  Bank of America's starting charging monthly fees for debit card usage to some customers. This is being taken as an "I told you so" by opponents of the Durbin Amendment, who argued that it would only result in higher costs for consumers. Actually, the BoA move is exactly what we might expect:  consumers are having to pay for their rewards. That's how it should be. They might be paying too much, but that's another matter.  So what does Bank of America's move tell us?

(1) The Market Works! On broad level, what BoA is doing is exactly what should happen if the market works. Customers who get rewards will have to pay for them. Put differently, customers who use debit will have to internalize the cost of their payment medium. BoA has not eliminated or even cut its debits rewards programs as far as I can tell (but please correct me if I'm wrong). That means if you want debit rewards, then go to BoA and pay for them. If you don't, go to USAA, which cut debit rewards rather than raise fees. That's how the market should work. (But see #3, below, about why the market doesn't work so well.) The market should bifurcate into a rewards market, where customers pay for their rewards, and a non-rewards market.  And that's what's happening. 

Yes, people got used to an entitlement of rewards points. They shouldn't have. There's no good reason for merchants to be paying for your rewards unless they get a merchant-specific loyalty benefit from those rewards.  Are you really going to patronize Chipotle and order more burritos than otherwise because you're getting frequent flier miles? I doubt it.  

(2) Or the market works more or less. While BoA's announcement is in a primitive form the cost-internalization move that we should all cheer, it's obviously not fine-tuned. For starters, it's not clear that $5/mo has any relationship to BoA's revenue reduction from the Durbin Amendment. Given that Wells is charging $3/mo, the $5/mo figure seems quite dubious. Moreover, the $5/mo is only being charged to certain customers. What this means is that there are some cross-subsidies being built into this fee. But that's between BoA and its customers who can always go elsewhere if they don't like how BoA treats them, right?  Well, keep reading... 

(3) Or just less.  Competition is seriously askew in the consumer banking market. BoA's ability to slap on another $5/mo fee is an indication of the competition problems in the banking market place. $60 in additional deposit account fees is more than a small, but significant increase in price. In a competitive market place, you can't do that without losing market share. We'll see what happens. BoA clearly thinks that it nets out positive. If so, that's a sign that we desparately need better competition in banking. It's also a sign that the DOJ was grossly (or wilfully) negligent during the 1990s and 2000s when it allowed some of the bank mergers that created the Too-Big-To-Fail banks to emerge. This includes the BoA-Fleet merger, which probably put BoA over the 10% Riegel-Neal deposit cap threshold. 

Now let me be clear. The problem in the US is not that we don't have enough banks. Frankly, we have too many. The 8000 or so depositaries in the US are an order of magnitude or two higher than in Europe, for example. And most of these are doo-hickey little local institutions. The problem is that in today's world, many consumers don't want a bank that just has a few local branches. The community institutions can offer better customers service, but they don't have the bells and whistles and the convenience factor. The problem, however, is not just that we don't have enough banks of sufficient size to offer bells and whistles; in fact we probably do.

No, the critical problem in consumer financial services is that there is not robust price competition.  We've got lots of competitors, but competition is running along the wrong axis. There isn't serious price competition in this market because there's no easy way to compare prices. Put differently, there's a serious information problem in this market. There is no easy way to compare the price of having a deposit account relationship at BoA with that of having one at Wells Fargo, much less to compare every deposit account relationship within my local area. Look at the USAA form linked above--it tries to do a comparison with some competitors, including BoA (it's from before the new BoA fee). That's a start, but it doesn't come close to showing all the differences between the account terms. And good luck finding the same thing that includes Chase, Citi, and CapOne.

Now, for all I know, the community bank a few blocks away from me has a much better deposit account deal than BoA, but the search costs of learning about that are high enough that I won't bother to find out. There's no easy source for the information, much less a standardized set of metrics for comparison. As a result, I can't compare apples-to-oranges, much less apples-to-apples. If you don't believe me, check out this Pew report detailing the difficulty in getting deposit account terms. 

What's more, even if I do know that I can get a better deal than BoA, the deposit account relationship is sticky enough to prevent me from switching unless I see major savings. Switching banks has always been a pain because of things like having to get new checks, having to wait until old checks (incoming and outgoing) clear, and the anti-money laundering know-your-customer rules. One would have thought that the shift to electronic transactions would have made this process easier. In fact, however, electronic payments have made the banking relationship stickier, through direct deposit and automatic bill payment that have to be cancelled and reestablished when changing banks.  

The deposit account is the cornerstone of all consumer financial relationships. I hope that the CFPB will make it a top priority to develop (1) easily comparable, standardized deposit account terms, (2) a comparison mechanism that helps consumer do comparison shopping among local institutions, and (3) a set of rules that maximize the transferrability of deposit account relationships. Banks should not be allowed to capitalize on consumers by making deposit accounts intentionally or unnecessarily sticky. For example, if I set up direct deposit and bill pay with one institution, I should be able to seamlessly transport that set of transactions to another institution. Were that the case, I would switch banks in a heartbeat if I were treated poorly. Instead, I, like most consumers, will suck it up unless there's something truly egregious because the switching costs are too high.

The CFPB should strive to make this market more efficient by lowering switching costs. Yes, it might costs banks some supercompensatory profits, and yes, market share might actually switch to the best competitors. Boo hoo. 

(4) Of course this is about bank profits, not consumers. If you thought for a second that the banks' anti-regulatory push was out of concern for consumers, rather than their own profits, note this language in the USAA form (and remember that USAA is one of the "good guys" in the consumer finance space):  

USAA has always returned the majority of this revenue to members in the form of benefits such as free checking accounts, ATM fee refunds and rewards programs.

Put a different way, USAA is not doing a direct pass-thru to consumers if debit card swipe fees. USAA is pocketing as much as 49% of swipe fees for itself. The language doesn't specify the percentage, but it's clearly less than 100%.  This is what merchants have always alleged--that swipe fees are too high because banks treat them as a profit center, not just a way to fund services that consumers want. 

(5) Has BoA been leaving money on the table? There are only two ways to understand what's going on with BoA:  either customers will leave BoA, in which case this is a hare-brained decision or they won't, in which case BoA's been leaving gobs of money on the table. If customers will pay $5/month for a debit card now, they would presumably have done so before the Durbin Amendment. So either BoA is making a bad move now or it hasn't been maxing out on its customers' demand elasticity in the past (which is what it should be doing). 

(6) The Big Picture. Finally, what is being missed in all the media coverage of this is the big picture. Consumer debit card fees are part of a net financial picture. If a consumer pays $5/mo for using a debit card, but saves $10/mo in lower prices from merchants, it's a net plus for consumers. We don't know what is happening in terms of merchant prices (and services)--it's just impossible to sort out the benefits of lowered interchange costs from all sorts of cross-cutting factors that affect prices. (And in any case, it's far too early to expect to see any changes.) That means we don't really know what the impact of the Durbin Amendment is here, and it's irresponsible to claim otherwise. Put another way, the story here is really about the competition problems in the consumer deposit account market, not about debit cards, which are just one part of that market. 

Comments

What does debit card fees have anything to do with rewards? No debit card using a pin has ever netted me a reward. This is simply greed. The banks make less money on debit pin purchases now due to the cap, so they want to make money in another way. My only regret is that no one had the backbone to enforce a cap of 7-12 cents instead of the 44 cents now.

Perkstreet offers 2% cashback ($5k checking minimum, else 1%) on non pin purchases via their debit card. They managed to not come up with a new fee scheme.

"Now, for all I know, the community bank a few blocks away from me has a much better deposit account deal than BoA, but the search costs of learning about that are high enough that I won't bother to find out."

Does this make these fees a laziness tax?

You probably should check the community bank down the street...some of them including the one down my street refund ATM fees charged by _other_ US banks for using ATMs (given adequate min. balance and other fine print), which eliminates the convenience factor advantage that large banks used to have.

I switched my accounts away from Wells Fargo (to PNC) in response to the Wachovia-Wells Fargo "merger". I was SHOCKED at how easy it was. I was able to move my online bill pay with a few clicks of a mouse. It was actually a little disconcerting leading me to believe that all this information is saved in a cloud somewhere for all banks to access. Had I known how easy it was, I would have done it long ago!

Good post! Yes, folks, if you don't want to pay $5/month, don't. Either forego the convenience of a debit card or find another bank. The banks screwed consumers for years with hidden fees but we can't have our cake and eat it too. Providing deposit, payment and other related services cost money and banks will mark up those costs to make a profit. As long as you accept that we live in a (quasi) capitalistic system, you have to accept the responsibility for making choices with your money.

Unfortunately for bank executives and their shareholders, providing financial services in a transparent and fair market will not yield a 20% return on equity or anything close. Unless of course our governments' continue to provide entitlement programs to reimburse bank equity and bondholders for any losses they incur from high risk investments.

"If customers will pay $5/month for a debit card now, they would presumably have done so before the Durbin Amendment."

Not necessarily. Banks have been pushing hard to convince us to use plastic for all transactions, no matter how small. Partly this has been achieved by making it "free". It's only after the user has been sufficiently hooked on the drug that you can up the charge.

Also, you say that the market works because the user is paying for the rewards (assuming they actually get some). Perhaps you know more of the details than I do, but I was under the impression that reward points are partly paid for by increased merchant charges. The merchant is paying your rewards. Does the new fee mean BofA will reduce merchant fees? Will I not be surprised if the answer is "no"?

Personally, I try to avoid using plastic and use cash as much as possible.

when was the last time there was actually a reasonably fair market place when it comes to banks?

Also there is no evidence that Bank of America thinks this nets out positive. Bank of America is doing what it has been doing for the past several years: trying to show the government and the people they are too big to fail and that they deserve more bailouts.

They are acting like a spoiled children who just got their sucker taken away. They are going to show America and the Government that they better not stop on the toes of Bank of American or we will continue to screw all of you. (and by the way we didn't need the tarp, you forced it on us)

Interesting post, thanks very much.

In the late 80's, when I turned 16 years old, I started my first job. In order to pay my car insurance and other bills, I opened a checking account at BofA. Then, I was paying $12 a month in maintenance fees, which was the standard pricing for a checking account. So in today's dollars that is equivalent to about $23. The $5 a month BofA wants to charge seems like a bargain.

Paragraph 3) -- "desparately"??? *sigh*

When I first learned of the $5 debit fee I went right away to our local credit union bank to switch immediately. I downloaded all the information on my statement that referred to the two direct deposit items I receive every month. I told the bank lady that I liked their terms and sign me up. I then produced my direct deposit info and she said that I had to do that myself. Her bank could not do that automatically. Well, so much for that. I took my stuff and went home. Since I don't pay any service fee and are on the pennies savings rewards program at BOA I guess I will just swallow the $5 fee and consider that what I earn each year in that small rewards program goes toward the $60 a year service charge. I call it my 'laziness program.' The thought of contacting the Social Security department to switch banks or my direct deposit on a legal case I just won exhausts me just writing about it. If all of this stuff were stored in the clouds, I'd switch in a heartbeat. Thanks for the great article.

I own a business, so here's the merchant's point of view on this: the banks are robbing all of us blind and covering their tracks with "rewards". Yeah, they give you 'rewards' all right, but have you ever stopped to consider where the money comes from? It comes from the merchant ~ and guess what, we have no choice but to pass this cost along to you. Consider that back in the day, a bank charged you 10 cents to process a check. Let's say you bought a mattress from me for $799. The bank got 10 cents for processing that transaction between you and me. Then the big banks invented credit cards, for your 'convenience' and so you could buy things you can't afford. Now, when you swipe that credit card, the business owner pays the big bank to process the transaction. Guess what their cut is now? If you pay with a debit card with a PIN, I'll pay the bank $13.18 (1.6%) or if you're using a 'rewards' credit card, in some cases I will pay as much as $39.95 (5%) for the bank to process the transaction, which probably costs them less than 10 cents. Oh, and don't forget the per transaction fee ~ that's extra too. New charges show up on our statement from the credit card processor all the time. Somebody calculate the percentage increase on that baby! It's a legal mafia folks ~ they get a cut of every transaction made with a credit or debit card in this country. You do the math. It costs me more to process credit cards every month than it costs me to run my 14-ft box truck to deliver our mattresses, and that includes fuel. SO. You really want to screw the big banks and force all banks to go back to doing what they should be doing instead of robbing us blind and corrupting every legislator on the planet with all the money they're making?? Cut up the credit card. Stop buying what you can't afford. Pay in cash or by check. Use only local banks. Don't let them get their hands on ONE PENNY of your hard-earned money.

What's ironic about this whole issue is that Durbin et al's calls for consumers to find a bank that doesn't charge such fees basically involves shifting accounts to banks that are exempt from his amendment. Credit unions, your local community bank, etc. If the objective was to decrease merchant fees, then that suggestion seems to be a self-defeating proposition, as those banks can continue to get whatever (generally higher) interchange fees the market will bear. If the objective was to stick it to the big banks, well, then we see at least one true objective of this whole debacle.

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