Bank of America Corp., the nation’s largest issuer of debit cards, plans to start charging its checking customers $5 per month, or $60 annually, if they use their debit cards to make purchases.
Taking a cue form BofA, other banks may initiate similar fees, thus weakening or even killing debit cards, increasing the use of credit cards and forcing some consumers into the ranks of the underbanked, observers say.
The fees, effective early next year, prompted a quick reaction from Sen. Richard Durbin, author of an amendment to the Dodd-Frank Act that led to a cap on debit card fees.
“It seems that old habits die hard for Bank of America,” a press release from Durbin’s office said. “After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It’s overt, unfair and I hope their customers have the final say.”
Many banks have cut back on perks or added fees to checking accounts that once were free to recoup the revenue they will lose from new debit card regulations. The Federal Reserve Board set the cap at 21 cents and gave issuers some leeway to add a few more cents to address fraud and other costs, which compares with the current average of 44 cents. Those rules go into effect Oct. 1.
Many consumers prefer to use debit cards to credit cards, and debit became increasingly popular during the recession as consumers cut back on buying all but household necessities.
Some banks, including Wells Fargo & Co. have already started testing fees for customers who pay with their debit card. But now BofA, which does business with one out of every two U.S. households, may kill debit’s popularity in one fell swoop.
“Because the bank is so big, other institutions will likely follow suit, so you’ll have a part of the population that probably begins to move away from being active debit card users,” says Mary Beth Sullivan, managing partner at consultancy Capital Performance Group Inc.
BofA also is consciously driving away some customers who cannot afford, or will be alienated by, the new fee, she says.
“There’s a lot of consumers for whom this won’t be well-received. They aren’t going to like this,” Sullivan said.
Some of those customers may go to other banks, especially the smaller regional and community banks and credit unions who still offer free checking. Bankers at those institutions say they cannot afford to alienate customers by adding fees or cutting perks from accounts that once were free. Many of those institutions also are exempt from the new debit-fee caps because their assets are below $10 billion.
But some of BofA’s checking customers also may join the ranks of the underbanked, who rely more on cash than on cards and who do not use traditional banks for all of their financial services.
The bank will not charge checking account customers who use their debit cards to take cash out of ATMs, BofA spokesperson Betty Riess said. The fee applies to most checking account customers every month they use their debit cards to buy something, but customers who have certain premium accounts are exempt.
“The economics of offering a debit card have changed with recent regulations,” Riess said.
A recent Federal Reserve Bank of Boston report contends the Fed’s debit card regulations will encourage more consumers to use credit cards.
Issuers, including BofA, also are helping to promote such a transition.
Starting Nov. 16, brokerage clients no longer will earn rewards when using the bank’s Merrill Lynch deferred debit card, which links to a customer’s brokerage account and deducts funds for transactions at the end of each month. The bank is urging customers who wish to continue to earn rewards to apply for a Visa-branded credit card.
