BofA to Impose Debit Card Feed: Will Competitors and Consumers Stay on Board of Jump Ship?

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By: Samantha Cornell

Bank of America (BofA) recently announced that it will begin charging customers a five dollar monthly fee for use of their debit cards. The implementation of this fee will launch in January 2012, making BofA the first major national bank to charge customers a monthly fee to shop with their debit cards. The fee will only apply to its basic checking accounts, leaving its premium and platinum accounts unaffected by this change. The fee will be triggered on a monthly basis if customers use their debit cards for any purchase. The fee however will not be triggered by ATM withdrawals, online bill payments, or mobile phone transfers.

BofA’s new fee is one of the revenue-generating measures that banks are employing in response to the newly implemented federal banking regulations. Specifically, the Dodd-Frank Act’s Durbin Amendment effective October 1, 2011 caps the fees banks can charge merchants for processing debit card transactions at 21 cents per transaction, a significant drop from the previous average of 44 cents. The long-term implication of this Amendment could potentially cost banks billions of dollars. In light of these legislative changes, banks have attempted to alter their source of fee revenue. Prior to the limitations, banks were once charging merchants the fees that they will now pass on to their customers in an effort to maintain this source of revenue. Although the government was well intentioned in enacting legislation aimed to protect small business owners, the measure has inadvertently hurt the average citizen. By targeting only basic checking accounts BofA is essentially holding the lowest earning population that subscribes to such accounts responsible for making up the potential lost revenue.

BofA is not the only bank attempting to recover anticipated lost profits; banks nationwide are implementing new procedures to combat the potential effects of this Amendment. For example, banks are overhauling customer accounts through instituting new fees, spreading costs more evenly among customers, and eliminating free checking and rewards programs.

Despite many other banks installing new measures to increase revenue, BofA has faced a backlash from the market after announcing the new debit card fee. The bank observed more than a 2 percent decrease in late-morning trading, and its shares plunged almost 44% for the quarter, asserting itself as the lowest-performing Dow Jones industrial average by far.

Beyond the declining market performance,  BofA now faces an uphill battle with public relations and customer relations. The debit card change has sparked outrage on the Internet and many major cable news channels. Consumers have lashed out using social media networks to demonstrate their anger, with many customers publicly declaring they will be switching banks in an effort to avoid the fee.

However, despite the negative press, the new fee may not harm BofA as much as some may predict. According to industry representatives, such fees may become more prevalent as other banks try to compensate for lost revenue under the Durbin Amendment, and there is strong indication that this type of fee will soon become the industry norm. For example, SunTrust, a regional bank based in Atlanta, began charging a $5 debit card fee on its basic checking accounts this summer. Chase Bank and Wells Fargo are also planning and testing $3 monthly debit card fees in select markets.

Other banks have resisted joining the ranks of the institutions implementing these fees. Citibank stated earlier this month that it would not impose debit card usage fees as part of a broader account restructuring. However, Citi is raising fees on certain checking accounts in a similar attempt to offset the lost revenue.

Even if other banks decide against implementing the controversial new fees, BofA may still prevail. Actively lowering customer attrition rates is one of the most important strategies for many consumer banks, but banks are very well aware that keeping customers captive is just as important as keeping them happy. Frustrated BofA customers are quickly realizing that it is not so easy to disentangle their lives from their bank. The Internet banking services sold to customers as conveniences, like online bill paying, serve as powerful tethers that inhibit customers from switching banks. Therefore, although BofA will not begin charging customers for their online transactions,  it appears that customers may stay put in an attempt to avoid the overwhelming inconvenience of transferring online bill paying arrangements to another bank.

Members of Congress have noticed this increasing problem. Representative Brad Miller  (Democrat – North Carolina) introduced a bill this month that would make it easier for customers to switch, as “the difficulty of moving accounts is deliberate and unnecessary.” The Freedom and Mobility in Banking Act was introduced in direct response to big banks pushing additional and increased debit card fees onto customers. The Act is currently supported by consumer, civil rights, labor and industry groups such as Americans for Financial Reform, AFL-CIO, SEIO, NAACP, Consumer Federation of America, The Leadership Conference on Civil and Human Rights, and Retail Industry Leaders Association.

It is important to understand that implementing debit card fees may harm banks even if customers stay put. This summer, an AP poll found that two-thirds of consumers use debit cards more frequently than credit cards, but over sixty percent said that they would use other means if charged a debit card fee. If and when customers use new methods of payment, bank revenues would decline despite the banks’ fee related efforts and customer retention abilities.

In response to the these new fees, Democratic lawmakers asked the Justice Department to investigate whether the banks colluded in setting the fees. The Occupy Wall Street protestors have also used the new debit card fee as a platform for their stance on corporate greed. Activists are calling on account holders to switch to nonprofit credit unions en masse on November 5, which they optimistically deemed “Bank Transfer Day.” Senator Durbin, who championed the legislative provision that imposed caps under Dodd-Frank, said in a prepared statement, “After years of raking in excess profits off an unfair and anticompetitive interchange system, BofA 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.”

Update:

It appears consumer sentiment has prevailed in the case of BoA as they seem to be ready to drop plans for the fee.

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Fordham Journal of Corporate & Financial Law