Debit Fee or No, Megabanks Must Ditch Unprofitable Customers

So much for debit card fees.

In the effort to bolster the dwindling profitability of retail megabanking, it's back to the drawing board.

The attempt by large banks to impose such fees wasn't just about wringing a bit of extra revenue out of existing customers. It was an effort by Bank of America and its competitors to rework their basic retail account business model, which has been sapped by a combination of the institutions' own inefficiency, the one-year-old restrictions on overdraft fees, and a new cap on interchange fees.

There's room to debate the wisdom of charging debit card usage fees, rather than jacking up checking account service charges, as Citigroup Inc. has done. But in both cases, the likely goal wasn't to earn more fee income so much as to give marginal customers a shove toward the door. With Bank of America now suggesting it may give consumers more ways to avoid the fees — and its competitors retreating from them at a sprint — this goal remains unfulfilled for the country's largest banks.

That Wells, JPMorgan, and SunTrust have retreated entirely on debit card fees is "a huge disappointment," says Mike Moebs, a consultant who follows retail banking pricing and profitability. "They should have come out and supported what [B of A CEO Brian] Moynihan did. Instead they're fractionalizing themselves."

Whether Bank of America ultimately sticks with a more limited debit fee plan or not, the rationale for the move remains intact.

"If they're smart about it, they'll find the single-service checking account households" — the ones that only have one product with the bank — "and they'll still charge [those customers] more," Moebs said.

According to Moebs' research previously discussed in American Banker, operating a checking account costs the megabanks between $350 and $450 a year — at least $100 more than it would a smaller institution.

While it's possible for a small bank or credit union to eke out a profit from such customers, that's not feasible for an institution such as Bank of America. Far from raking in cash, as consumer advocates have alleged, Moynihan told analysts on B of A's third quarter earnings call that the company was struggling to keep low-balance, single-product relationships profitable.

"The issue is, when people split their relationship and use our convenience and our access and our 18,000 ATMs and our no foreign ATM fees and our online banking product and all that, and yet have their relationship elsewhere," Moynihan told analysts. "That is tough for us to afford to provide."

The comment glossed over how Bank of America will approach customers whose finances are sufficiently limited that they don't have relationships to split. Bank CEOs had no problem arguing before implementation of the Durbin amendment and overdraft fee opt-ins that these regulations would increase the ranks of the unbanked. But few of these executives want to draw attention to choices meant to boot poor customers from their banks.

As a simple business proposition, however, inducing such customers to leave may make sense as a cost-cutting exercise. With Bank of America laying off employees and dropping noncore business lines, there is a strong case for turning the same reductive eye on its customer base.

As Moebs notes, slapping fees on price-sensitive customers is a venerable — if not especially cuddly — business tactic.

"Go back 15 years, and read the American Banker articles on Citi charging an annual fee for a credit card, or look at the First National Bank of Chicago charging to see a teller," he said. "Those two [unpopular pricing decisions] hit national debate levels, but in both cases the institutions stuck with them."