Surrendering in face of an onslaught of consumer outrage, Bank of America raised the white flag yesterday and jettisoned its plan to slap consumers with a $5 monthly fee for purchasing with their debit cards. Chase, Wells, Regions, and SunTrust were some of the banks that had already cried uncle not before long.
The $5 debit card fee decision will likely to down as one of the biggest marketing blunders of the decade. Ill-timed and badly thought out, it was painful to watch Bank of America twist in the wind as it was pummeled by consumers, politicians, competitors, the media, and occupiers daily. (Related: Bank of America Will Not Implement Debit Usage Fee)
Appearances count for consumers. The debit card is the way that most consumers pull money out of the checking accounts. That, then quite naturally, led to the claim that banks were charging consumers for getting access to their own money. Silly as that assertion is (sort of like complaining about paying to get furniture out of storage), it resonated. The Bank of America debit card fee structure was also way too cute. Consumers only had to pay the fee if they used their debit card during the month. That’s like telling people they only have to pay their electric bill if they turn on the lights that month. There was a fair bit of evidence presented and publicized by TCF during its lawsuit that consumers would flee from banks.
Of course, the effort of banks to replace the billions of dollars of revenues they’ve lost as a result of the Durbin price caps isn’t over. More than 100 banks are subject to Durbin. They’ve lost 10% or more of the revenue they were earning from offering checking accounts to consumers, largely for free. They don’t really have any choices as businesses but to figure out some way to get some of those revenues back by either raising fees or reducing costs by cutting services.
Politicians can talk until they are blue in the face (why aren’t most of them anyway?) about how banks shouldn’t raise fees because they got TARP funding or because they get gazillions in trading profits. But most of the banks that have been whacked weren’t bailed out and they aren’t particularly flush these days. And in the real world, the person running the checking account or retail banking operation for the bank doesn’t really get to go to the CEO, the Board, or the shareholderstockholders and say, hey, sorry I just more than 10 percent of my revenue – so just suck it up.
The 100+ banks subject to the Durbin price caps account for about 70% or so of checking account deposits. They are all in the same boat, and they are all going to be working at plugging the holes in their balance sheets. It is inevitable fees will go up, and services will be cut, as they already have. But it is likely that this won’t be the “in-your-face” approach that Bank of America used. It will be reducing the conditions for free checking, raising fees here and there, cutting rewards and other programs, closing branches and so forth.
One factor that could constrain these banks is the fact that consumers can switch to exempt community banks and credit unions. Those smaller bank and credit unions (less than $10 billion in assets) can get an interchange fee set by the networks that is higher than the caps. They were opposed to the caps, despite what appears to be a real benefit, because they thought, in the end, the networks would push their interchange fees closer to the big bank rate. But even if the exempt banks do maintain the higher interchange fees, they might end up raising their rates to consumers anyway. They will balance business stealing by undercutting the large banks against increasing fees somewhat to existing customers who aren’t likely to switch to the even higher priced big banks. In the end, I doubt the exemption is going to constrain what large banks do.
One way or another, the Durbin price caps will result in consumers paying billions of dollars more in either higher bank fees or by receiving lower services annually. (Related Lydian Journal Article: The Net Effects of the Proposed Durbin Fee Reductions on Consumers and Small Businesses) Merchants, on the other hand, will save billions of dollars, and we’ll have to see when and how much of those savings that pass on in the form of lower prices.
David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework®, a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass. David is the Founder of Market Platform Dynamics. Read More
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