More Fees Brought to You by Bank of America
Debit card transactions have become a way of life. According to a recent Nilson Report, debit card use rose from 1% of transactions in 1995 to over two-thirds of transactions today. Yet, for the over 38.7 million Bank of America debit card users such transactions will now cost more. Bank of America recently announced that it will charge a new $5 per month, or $60 annual, fee for its customers to use their debit cards for purchases.
According to Bank of America, as well as other financial institutions that are considering similar fees, recent legislation has impacted their profits, and such fees are needed in order for them to remain profitable. Specifically, they blame the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank Act) provisions regarding interchange or so-called “swipe” fees. As we have discussed in previous blogs, the so-called Durbin Amendment to the Dodd-Frank Act granted the Federal Reserve (Fed) the authority to regulate the amount of swipe fees (i.e., the fees that a card issuer can charge retailers for transactions involving their cards) to ensure that they are “reasonable and proportional” to card issuers’ costs. Although, about $16 billion in interchange or “swipe” fees were collected in 2009; averaging around 44 cents per transaction, a report issued by the Fed found that the median total processing cost for debit and prepaid card transactions was actually 11.9 cents per transaction. Thus, the Fed issued proposed regulations that would have capped interchange fees at 12 cents, starting in July. After receiving public comment, the Fed ultimately decided in its final rule to cap the maximum permissible interchange fee that a card issuer may receive for an electronic debit transaction at the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This rule became effective October 1, 2011.
The new rules exclude banks with less than $10 billion in assets meaning it only applies to big banks, not community banks and credit unions. Yet, since this cap will cost large card issuers billions, they have been looking for additional sources of revenue. In addition to fees for debit card transactions such as the one proposed by Bank of America, debit card issuers are also considering “unbundling” (i.e., dividing debit card services into components and charging for each of them separately), as well as limiting the amount of debit card transactions. Free checking could very well be something of the past as well. Bank of America has already begun to charge $8.95 per month to open a new checking account with access to a teller and paper account statements. According to the latest data from economic research firm, Moebs Services, only about half of Wall Street banks are now offering free checking.
The fees and decline in free checking accounts has not gone unnoticed by the Obama Administration. In a recent interview with abcnews.com and Yahoo President Obama called the $5 fee “not good business practice” and later added “this is exactly the sort of stuff that folks are frustrated by.” In the same interview the president urged lawmakers to confirm Richard Cordray, the nominee to lead the Consumer Financial Protection Bureau to ensure that the CFPB can prevent such arduous fees in the future. Vice President Joe Biden was also vocal about the subject saying the fee is another "tone deaf" move that the public is angry about. The administration is not alone in their opposition; many community leaders and advocates agree and have begun a petition against the fee at Change.org.
While everyone is up in arms over Bank of America’s new debit card transaction fees, clearly it’s low- and middle-class Americans who will suffer the most. In fact, account holders with a combined bank balance of over $20,000 or have a mortgage with Bank of America are not required to pay the monthly $5 fee. Low-income consumers who do not have large balances and more often than not, do not own homes, are therefore the ones being targeted by Bank of America. As Tom Feltner of the Woodstock Institute explains, banks will probably start competing at different levels in order to appeal to those with high balances, while those with low balances are the ones targeted to for extra fees.
Under the rules, Bank of America can still charge 21 cents for debit card transactions and, since it only costs about 12 cents for the transaction, it will still make money, just not as much. And therein lies the crux of the matter—who gets to decide how much profit is enough? For too long, big banks have been the ones deciding this question to the detriment of the American public. The new regulations have taken the decision out of their hands, but of course banks are not going to give up that easy. So as they struggle to find other revenue streams, it’s up to us to ensure that consumers, especially not low- and moderate-income consumers, aren’t the ones forced to pay out.
This post was coauthored by Alison Terkel.
