|by Jason Steele|
Last week, I tried to explain the Bank of America Debit fee hike that had upset so many Americans. To me, it seemed like BoA was just trying to take advantage of the Dodd Frank in order to jack up their fees to consumers. This was analogous to how the banks reacted to the CARD Act by dramatically raising interest rates. Indeed, other observers have come to the same conclusions, most notably Timothy Noah over at The New Republic. What’s interesting about Noah’s analysis is that he takes it one step further. To him, BoA might be trying to drive customers away from their debit cards and back to their credit cards. The way he looks at it: “The larger point is that B of A now plans to charge people even more than they did before to spend their own money. Maybe they’ll piss debit customers off so much that they’ll go back to their credit cards. Which would suit B of A just fine.”
The premise of his argument is that banks exist to help people spend money they don’t have, like in the case of credit cards, not money they do have, as with debit cards. Personally, I find this argument fascinating, but a little specious. I think most consumers understand that credit card debt is going to be far more costly than a $5 a month debit card fee. That is not to say that they are willing to pay that fee. I think that disgruntled customers will close their account with BoA altogether rather than just politely switch from a BoA debit card to a BoA credit card. People with bank accounts need debit cards to access their funds, and a credit card is not the answer.
What People Will Do
I think that many of them will switch to smaller banks. These smaller banks and credit unions are still able to charge more fees for debit card transactions. Therefore, there is less of an reason for them to charge monthly fees for debit cards. Personally, I have always done my banking with a small, out of state bank that charges no fees and even returns third party ATM fees.
How The Market Shakes Out
It just doesn’t seem like the business practice of charging for debit cards is very sustainable. Big banks still make money off of the swipe fees, just not quite as much. Furthermore, the exception for small banks and credit unions will force them to be more competitive. I just don’t see people signing up for a debit card with fees when there are so many no-fee products out there.
Credit Cards As An Alternative To Debit Cards
Of course, there is one way to use your credit card and not borrow money. Always pay your balance in full. No, most people don’t use their card that way, but many, like me, do. Doing so allows you to avoid all interest and fees while getting a free loan and even earning rewards. If your bank is imposing a debit card fee, it may be time to switch banks. If you think that you can reliably manage to pay your credit card balance in full and on time, maybe it is time to start using your credit cards as your primary method of payment.