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Debit Card Fee Backlash: Will it Change How You Pay?

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Consumers are reeling from Bank of America’s recent announcement that they would he charging debit card holders $5 a month. Even those who are not even customers of theirs are concerned that these charges will become commonplace. As the New York Times reported:

Bank of America, the nation’s biggest bank, said on Thursday that it planned to start charging customers a $5 monthly fee when they used their debit cards for purchases. It was just one of several new charges expected to hit consumers as new regulations crimp banks’ profits. Wells Fargo and Chase are testing $3 monthly debit card fees. Regions Financial, based in Birmingham, Ala., plans to start charging a $4 fee next month, while SunTrust, another regional powerhouse, is charging a $5 fee.

What’s Going On?

The Times article cites a new Federal rule that will curtail merchant fees that the banks receive from retail transactions. At $5 a month, these cards will be a really poor value to many consumers, who may flee debit cards and go back to other forms of payment. That is rather ironic for several reasons. First, debit cards were originally known as check cards. Their use is far more cost effective for everyone involved, compared to using a paper check. In fact, I can’t think of a less efficient way to pay someone than writing a paper check, having a merchant deposit and a bank claim it against an account in another institution. Nevertheless, consumers will be wise to break out the check book and to avoid their debit cards if their use carries a hefty monthly fee.

Another reason this is rather ironic, and unfortunate, is that there was a growing trend towards the use of debit cards. Even though I write about credit cards here and elsewhere across the Internet, I actually feel that debit card use is more beneficial to many people. Obviously, with a debit card, consumers can’t get into debt. Furthermore, since most credit card users carry a balance, I feel that they would be better off with a debit card. In fact, debit card use had been increasing while credit card use was tapering off. These were positive trends, especially for a country that has just gone through a costly debt crisis. As a side effect and benefit, the weak consumer market for credit cards has probably been responsible for the fantastic sign up bonuses that have been offered this year.

This new rule, and these new fees, threaten to undo much of the progress that has been made. Part of me thinks that this is just another publicity seeking over reaction by the banks in order to generate opposition to this new rule. Banks still make money every time a consumer uses their debit card, just not as much. It is hard for me to believe that they can’t continue to offer these cards for free, let alone charge $5 a month, and still make some profit. Last I checked, banks are still handing out iPods and sports tickets for new customers, so I have a hard time believing that their business teeters so close to unprofitably that they now have to charge debit card users $60 a year. It remains to be seen if the market will sustain these rates.

What This Means For Credit Cards

Merchants are constantly trying to impose similar fee reforms on the credit card market. So far they have failed. There is no doubt that the reward card system, the way it is, is merely a kickback of these fees to consumers. It might stink for merchants, but as a consumer, I love this system. It keeps me and my family flying in business class around the world. Should these fee caps ever reach the credit card market, it will be the end of an era as the merchants take revenge on banks and consumers.

 

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