Banks don’t like it when their imperial right to loot customers runs into interference, do they?
The Los Angeles Times reports that Bank of America intends to start charing customers $5 per month for any debit card use starting next year. The exceptions will be certain customers that the bank regards as sufficiently profitable otherwise so as not to be worth annoying, such as those with a $200,000+ mortgage or an account at Merrill Lynch with balances over $20,000.
Narrowly, of course, the argument is accurate. The Charlotte bank is trying to preserve margins by circumventing the intent of new legislation, which was intended to stop what amounted to bank price gouging for debit cards (you can drive a truck between the cost of providing the service and what banks charged). That’s why it’s such a shame our bank regulatory apparatus has been co-opted by the industry. A competent regulator would beat back a brazen effort like this to game new rules.
It’s hardly novel to say that the banking industry has become too large relative to the real economy and increasingly extractive in its posture. The industry needs to shrink, both in size in profits. Simon Johnson made that point emphatically in his article The Quiet Coup; we made similar arguments in ECONNED. The intent of the legislation was in fact that banks make less money on the debit card service; the BofA strategy to deal with it is tantamount to a stick in the eye.
In fact, it may turn out that Bank of America makes more money with its new fee scheme than its old one. The article notes:
Banks previously had charged merchants 44 cents on average every time they accepted a debit card for a purchase. Under new regulations that take effect Saturday, banks with more than $10 billion in assets will be able to charge merchants only 21 cents to 24 cents per transaction.
If you assume an average merchant charge of 22.5 cents, the bank does better if customers on average make fewer than 22 debit card charges per month. I have no idea what the norms are, but I guarantee Bank of America has done extensive modeling based on customer usage patterns. (Separately, I can’t understand why anyone would use a debit card; you lose the ability you have to dispute erroneous charges that you have with a credit card, plus if your wallet is stolen, someone can easily drain your account. I’ve insisted on getting an ATM card rather than a debit card, which is what my bank wanted to give me).
Consumers should brace themselves for a brave new world of lots of bank fees. Bank of America is no doubt hoping that it will be a price leader and the other major banks will copy its move. Now that banks can borrow at pretty close to zero, cheap sources of funding, like interest-free checking accounts and float aren’t as valuable as they once were. When I lived in Australia, it was pretty much impossible to have a relationship with a bank and pay less than $25 a month for it. The US banks are moving in that direction.
I nevertheless encourage Bank of America customers to take their revenge. Move your accounts to a small bank. Cancel your Bank of America credit cards. And be sure to let a bank customer services rep know exactly why you are done with them.