BANKTHINK

Why B of A Needs $5

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Is Bank of America Corp. charging for debit cards because it is shortsighted or because it is too bloated to compete against smaller institutions for consumer accounts?

The question framing is admittedly harsh, but it's hard to see an alternative explanation.

The stresses on Bank of America are felt across the industry: restrictions on interchange fees guarantee that debit card revenue will undergo a multi-year plunge, and restrictions on overdraft fees have diminished the profitability of checking accounts connected to the product. But while Wells Fargo & Co is testing out a $3 monthly fee on debit cards in a few markets, Bank of America is one of the first banks, and the biggest, that felt an urgent need to directly compensate for the lost revenue by adding debit usage fees system-wide.

There's a reason that other institutions have chosen not to act. The Durbin Amendment to last year's Dodd-Frank Act will cost the banking industry more than $5 billion in annual debit interchange revenue next year, down from the 2010 peak of $18.8 billion, according to Mike Moebs of Moebs Services. But as badly as debit card revenue will be harmed by the new restrictions on the processing fees that banks can charge merchants, interchange still has a promising future.

Bank of America explained its decision on Thursday by saying the "economics of offering a debit card have changed with recent regulations." But those economics may not have changed all that much in the long haul. Based on increasing debit card market penetration and rising transaction volumes, Moebs predicts that interchange revenue will rise to a new high by 2015.

In other words, as much as banks hated Durbin, they can wait it out. Per-customer revenues will recover.

Assume that impatience didn't drive B of A's move, however, and the picture gets darker. Studies of bank economies of scale have almost uniformly concluded that large banks are far less efficient than their smaller peers. In the case of checking accounts, the gap may be particularly pronounced.

According to survey data collected by Moebs, the average checking account costs a small bank between $175 and $200 a year between direct costs and overhead. Banks with more than $5 billion in deposits must spend between $350 and $450 per account.

Assuming that Bank of America falls into that higher range, it would be easy to see how it could go hungry on retail accounts capable of sustaining a herd of smaller institutions.

For a bank that boasts the largest consumer franchise in the country, this is an ominous prospect. But should it also happen to be reality, Bank of America's indirect move to rid itself of some customers would be the best option.

"I think this is going to cost them a million accounts," Moebs says.

Those accounts may be the ones that B of A no longer wants. Moebs notes that many of the customers who balk at $5 monthly debit card charges will be among the less profitable even after debit card revenues recover.

"If it's the case that [Bank of America is] beyond their economy of scale and can't make money on the bottom rung of accounts, then that is smart pricing," he says.

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Comments (7)
They can charge this because they have a huge credit card portfolio and they want to steer consumers to credit cards no impacted by Durbin interchange. It also drives consumers who notice into the branch for a sales opportunity and movement to a checking package that waives the fee for high usage clients.
Posted by Christopher S | Friday, September 30 2011 at 9:23AM ET
Every ad I hear for B of A makes me think of the $5 fee...they should have told their Agency to pull them for a week...but nobody said Countrywide, I mean B of A, was smart!
Posted by e1wood | Friday, September 30 2011 at 9:44AM ET
With BofA paying near 0% for its money, if they made a few more loans the loss of fee income would not be noticeable. I was a banker. I did this stuff. The measure is now for stockholders. With the price of BAC dropping like a stone, management wants to show that they are up to the challenge.

Here is the classic scenario we have seen over and over during the past 12 years: Regulations are passed to keep consumers safe. Banks ignore them and common decency. New regulations are passed to enforce the old regulations, and these too are ignored.

Congress has too much at stake in wanting the Banking lobby to support re-election bids to rein in the TBTF banks, or for that matter the industry (over $10B) itself.

In reality, we are moving back to a fee for service model. It wasn't that long ago that checking accounts cost a low monthly maintenance fee plus a "per item" charge. The trade off for the "free accounts" was that they would not pay interest. Remember that no retail DDA account paid interest until thrifts were allowed to open N.O.W. (negotiable orders of withdrawal) accounts, which were savings accounts, that paid interest, but that now could be accessed through a withdrawal ticket that looked like and functioned like a check.

I realize that the decision/reg came down 35+/- years ago, but that's what started the tug. ATM cards came next, quickly evolving into Debit or POS cards. The Banks wanted to get rid of the need to process millions of items each night, so electronic withdrawals became the norm.

Now that Banks have lost the income generated from card swipes, money that far outstripped costs, they want it all back. PAY NOT INTEREST, CHARGE FEES FOR EACH TRANSACTION, CHARGE A MONTHLY SERVICE FEE, PAY NO INTEREST ON DEPOSITS.

Even I could make money with a scheme like that and I left the world of banking in 1992

Richard Isacoff
rii@isacofflaw.com
Posted by riisacoff | Friday, September 30 2011 at 10:03AM ET
Thank you Bank of America for steering good customers to solid community banks who appreciate them.
Margaret L.
Posted by mliving | Friday, September 30 2011 at 10:07AM ET
An overt sign to its shareholders...trying to plug a gigantic hole with chewing gum.
Posted by s_saraiya | Monday, October 03 2011 at 12:01PM ET
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