Call it a defeat for banks, a publicity debacle, or a whole lot of hollering for no good reason. Whatever your read on the brief life of the debit card usage fee, its demise is just a prelude to more checking fees at the major banks.
Higher account maintenance fees are inevitable, because basic, relatively low-balance checking accounts are simply not profitable on their own. Despite the widely circulated allegation that banks are raking in money from regular consumer accounts, industry groups, analysts, and available data suggest that such accounts are money losers without overdraft fees or extremely high-margin interchange charges. This problem is worse for the major banks, which have higher overhead.
"They have to make up the revenue lost some way, and it has to come from fees on the checking account," says Bob Hunt, an analyst for TowerGroup. The question, he said, is "How do you structure it to avoid losing good customers?"
After a decade in which all customers were good customers, the banking industry must now adopt a narrower definition. Given the declines in overdraft fee revenue from low-balance customers and the diminished profitability of debit, Hunt argues, banks will likely need to seek "non-regrettable attrition," a polite way of telling low-balance checking customers to either provide more business to the bank or get out the door.
Richard Hunt of the Consumer Bankers Association - and no relation to Bob Hunt - puts a different spin on a similar outlook.
"We don't want to lose any customer, and we don't like charging customers for services they once received for free" he said of his industry. "I think it's in the customer's best interest to do as much banking as possible with a single bank. That increases the likelihood of having fee-free products."
With debit card usage fees DOA, Tower's Bob Hunt says, industry players are going to have to think of a different way to price their products that will woo profitable clients and discourage money-losers. Part of that decision will come down to the bank's internal operating costs. Because the megabanks have significantly higher overhead for accounts, they are the least able to afford low-dollar accounts without accompanying business. Smaller institutions are better able to service such customers, but even they will likely struggle to break even on a checking account that never has more than a thousand dollars in it. No-frills credit unions may be best suited to accommodate such customers.
Those dynamics would reinforce a three-tiered system in which megabanks end up charging the most fees and marketing themselves as offering convenience. The differentiation process has already begun, Bob Hunt says, and will likely last well into next year.
"Of the top 30 banks, 21 have implemented a charge where you couldn't get a free account," he says. The others will likely follow, unless they conclude that free checking is an absolutely essential part of their marketing efforts.
One ramification of this argument is that small banks may not derive much benefit from picking up the megabanks' aggrieved fee-paying customers.
"The community banks really can't afford to offer free accounts to everybody, either," Bob Hunt says.
How banks will price their products remains to be seen.
"The banks are going to be transparent with the customer. They're going to be clear about the charges that they're going to charge," said the Consumer Bankers Association's Richard Hunt.
That's what Tower's Bob Hunt says he'd also like to see. He advocates that banks offer a limited palate of choices: a basic package with fees; a package for customers who use the bank's other products; one for high-balance accountholders, and perhaps one or two more.
"Don't have a complicated 12-tier structure," he says. "Just say, 'if you can't maintain an account with $1000, it's $6 a month.' "