There has been a lot of outrage in the past few days over the fact that Bank of America has decided to impose a $5 per month service charge on all customers who use the debit cards for purchases. Recapping what has been reported already: the $5 is on top of all other fees assessed to your account, will not apply if you only make ATM deposits and withdrawals, and will not apply to Premier accounts.
Protestors, whether privately or publicly, have found one more reason to protest against mega-banks. Another avenue of outrage is focused on the “Durbin Amendment”. To make a long lesson really short, merchants typically pay between 2 and 3 percent when they accept your credit card for purchases. While a small fraction of this fee goes to the credit card processor that the store signed up with, and a tiny bit goes to Visa, MasterCard (and in some cases AMEX), most of the fee goes to the sponsoring bank. I can recall debit cards bursting on the scene about 16 years ago. Since then, many smaller to medium sized banks have been able to survive due to the fees they have collected from debit card purchases, processed as credit. In fact a large number of these institutions stopped issuing credit cards (outsourcing them to other banks) because dealing with debit cards was so much less risky. Make a purchase with your debit card, it comes out of your checking account — win win for everyone, right?
In the wake of the 2008 financial collapse, there was a lot of anger toward large banks. Congress passed legislation to reign in the banking industry. One addition to the Dodd-Frank Act of 2010, was the Durbin Amendment. In the past debit card transactions processed as credit carried with them the same 2 to 3% processing fees as regular credit cards. Of all of the standards in the banking industry, this seemed like one area that needed no tweaking. However, the amendement was approved and then Dodd-Frank became law. Initially the processing fee for debit card as credit transactions was set to a flat rate of .12 cents. Percentages would no longer apply. Finally, federal banking regulators relented a little and set the fee at .21 cents, effective Oct. 1, 2011. This is why B of A and other banks’ monthly debit card fees became a major part of the news cycle this week.
I think this will ultimately drive many customers to credit unions and smaller banks, but my strongest response is not one of politics or one of protest. I THINK THE FEE MAKES SENSE AND PROMOTES PERSONAL RESPONSIBILITY for a public wary of taking on more credit card debt. For a long time, I believed that the classic American Express (green) card was the best credit / charge card on the planet, even with its fee of about $60 per year, if someone had no use for the benefits that come with the Amex Gold / Platinum cards. Consumer advocates like Clark Howard hate the Amex “charge cards” because of the annual fee. However, with the exception of extending payments on occasional major expenditures like a family vacation, an Amex charge card needs to paid off IN FULL each month. I see the annual fee as a firewall against taking on more debt than you can pay off in 30 days. You are paying and in return, your card issuer is going to hold you accountable.
Bank of America’s annual fee should be interpreted in the same way. The debit cards issued by large banks are virtually as secure as credit cards in terms of the protections afforded the consumer. Currently, with the cards issued by B of A, Wells Fargo, and others you can charge fairly large purchases of $2,000 + and have the peace of mind that the money is going to come right out of your checking account. The transaction is over and done with. You don’t have to be faced with paying off your credit card next month. Therefore, this monthly debit card fee encourages you to keep using your debit card and not add to your revolving debt load. I predict that many banks who do not institute a monthly debit card fee or find another way to replace the lost processing fee income will severely limit the amount that you can charge to your debit card — imposing extreme caps as low as $50 or $100.