By Megan Cottrell
October 5, 2011
Late last week, Bank of America made an announcement: they're going to start charging their customers $5 a month to use their debit cards.
Needless to say, the response wasn't positive. Bank of America serves about 1 out of every 2 Americans, and nobody seems pleased about having to pay an extra $5 a month to spend their own money. The economic justice section of Change.org has even started a petition against the $5 charge which over 120,000 people have signed.
Of course, not everyone will pay the fee, Change.org points out. If you have a combined bank balance of over $20,000 or have a mortgage with BoA, your fee will be waived. So who does the fee target? Low- and middle-income customers who don't have huge bank balances and don't own homes.
"When the recession first hit, we gave Bank of America billions of dollars in bailout money. Our reward is higher fees for the same services. At some point, we've got to say enough is enough," writes petition creator Molly Catchpole.
But at the same time, another target emerged: Congress. That's who the banks were blaming and others soon followed suit. Those same economic regulations passed last year which limited how much interest a credit card company could charge also implemented another reform, one that just went into effect: a limit in swipe fees.
Rather than a fee for consumers, swipe fees are what merchants pay whenever you use your debit card - usually a flat amount, plus a percentage of the transaction. Having run a small business in Michigan in my former life, I can tell you that swipe fees are no little thing. Especially when people want to use their debit card for tiny purchases (think a $3 latte or a $8 pilates class), businesses lose a big chunk of change compared to if that person paid cash.
Because of the Dodd-Frank finance reform bill, banks are now limited in how much they can charge for swipe fees. Most merchants will pay 24 cents on the average transaction, compared with the 44 cents they have been paying. But banks say because they can't charge merchants, they have to charge consumers to make up their lost revenue.
Around the Web, there seems to be two reactions to this: 1) complaints about greedy banks, and 2) unflattering remarks about Congress. My first reaction was closer to the first. But then, probably because I like pondering the unintended consequences of public policy, I started to consider the second.
Kevin Drum at Mother Jones pointed out that charging an outright fee might actually be good for consumers, at least in that its not a hidden fee. Before, banks were using overdraft charges to make money and charging merchants a lot for consumers to use their debit cards. One could say we were always paying these fees, but we just didn't know it or see it on our bank statement.
But I wonder: do the banks really have to charge the fees? I understand the idea that banks are a service - they have to charge money to operate. So if they can't do it behind-the-scenes, they might have to do it out in front. Bank of America did make less than expected last quarter, but still profited $2 billion. And their losses are coming from the ugly housing market, a problem which many say that the banks had a hand in creating.
So, who's to blame here? Is this a case of good intentions gone wrong (or lousy economic theory), or are banks just making money off of us and blaming it on Congress?
I asked people for their opinion on Twitter and Facebook. I got divided responses - banks, Congress, and even retailers are to blame. I decided I needed an expert opinion, someone who had more to share than just a gut reaction. So I called Tom Feltner, vice president at the Woodstock Institute, a nonprofit here in Chicago that does a lot of research on financial matters. Feltner had a more nuanced view of the situation.
The federal reserve and the legislators who enacted these financial reforms, he said, didn't do this blindly. In fact, the federal reserve did quite a few complex analyses of the situation trying to answer the question, "What's a fair price for banks to charge retailers for swipe fees, one that covers the banks costs and doesn't gouge retailers?" The first estimate they came up with was actually lower - 12 cents, rather than the 21 cents they settled on. They listened to the financial industry when they said 12 cents was too low and nearly doubled their initial estimate.
"The federal reserve, as an independent regulator, staked out a fee that covers the banks costs," said Feltner. "Any additional fees banks look to recoup lost revenue from overdrafts or looking to push out customers that they see as unprofitable."
So is Congress to blame? Or banks?
"Congress acted to keep financial institutions from extracting an unprecedented amount of value from that debit transaction," said Feltner. "This is kind of leveling the playing fields between banks and retailers."
And Feltner agreed that it was better to have fees upfront, rather than hidden behind a financial curtain. But what was that about pushing out unprofitable customers?
"If you're only waiving fees for high balance consumers, you're essentially saying that you don't want those consumers who may solely need a transaction account a little bit longer," said Feltner.
Banks are showing us basic account holders who only have a checking account that we're not that profitable for them. So we can either pay a fee for using our debit cards or leave. Where are we to go? Feltner says that over time, banks will probably start competing at different levels - some offering fancy checking accounts with plenty of bells and whistles for those who maintain a high balance, and others specializing in basic, low-cost accounts for people who have less to leave in their account.
So, just for good measure, I asked Feltner one more time: is government to blame for higher fees?
"I think the federal reserve setting a fair market price was the right thing to do," he said.
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