JEFFREY BROWN: Big banks and the question of their profits have been the source of plenty of public anger since the beginning of the financial crisis. Now new fees for consumers are putting them in the spotlight again.
Swiping a debit card is about to get more expensive for tens of millions of Americans. The biggest bank in the country, Bank of America, says it will tack on a new fee, $5 a month, when customers use a debit card to make purchases.
The reaction was immediate.
WOMAN: I can use the ATM without having to pay fees, but now, if they’re going to start charging me fees, it kind of defeats the purpose of why I signed up with them in the first place.
JEFFREY BROWN: In a phone interview, Bank of America Spokeswoman Anne Pace called the move a sign of the times.
ANNE PACE, Bank of America spokeswoman: Clearly, the economics of offering a debit card have changed with the recent regulations. As a result, we have decided to introduce monthly usage fees.
JEFFREY BROWN: Bank of America won’t charge customers using one of its 20,000 ATMs.
The announcement comes after legislation was passed last year to regulate the financial industry. One provision directed the Federal Reserve to cap so-called swipe fees that banks could charge merchants when customers use debit cards. The Fed set that cap at 21 cents per transaction, which will go into effect tomorrow. That’s a big cut from the previous average of 44 cents per transaction, fees that yielded $19 billion for banks in 2009.
Bank of America is the biggest bank so far to add a monthly fee, but it won’t be the last, as giants Wells Fargo and J.P. Morgan Chase are now testing $3 debit card fees.
And we debate the new fees now with David Lazarus, consumer and business columnist for The Los Angeles Times, and Richard Hunt, president of the Consumer Bankers Association, a trade group representing the country’s leading retail banks.
We invited a representative from Bank of America, but they declined.
David Lazarus, I will start with you. You wrote in your column today, Bank of America isn’t just having its cake and eating it, too; it’s serving itself another piece.
So why do you think this new fee is wrong?
DAVID LAZARUS, The Los Angeles Times: Well, it’s not so much that it’s wrong. I don’t think anyone begrudges the banks charging a fair profit for a fair service.
And they are offering a lot of convenience. They are offering fraud protection. They are offering overdraft protection. The question here is, how much does it really cost the banks to process a debit card transaction and how much do these ancillary services cost?
Well, here is an example. The Federal Reserve says that it pretty much costs about 4 cents to process a debit card transaction, considering the huge economies of scale, 4 cents. So that means the current average of 44 cents represents a 1,000 percent profit.
So now that we know that, as of tomorrow, that’s going to be cut in roughly half to 21 cents, well, that’s still a 500 percent profit. If you can’t make money off a 500 percent profit margin, you are in the wrong line of work.
JEFFREY BROWN: All right, Richard Hunt, as a general proposition, why is this being done by the banks right now?
RICHARD HUNT, Consumer Bankers Association: Because we are forced to. I assure you the banks would not have raised fees on any single customer if they didn’t have to.
The fact of the matter is, Congress interjected itself through the Dick Durbin amendment that told us how much we could charge for a product. Now, I don’t think McDonald’s would appreciate if they were told how much they would charge for a hamburger or for a Coke. We don’t want to do this. We have no choice to do this to stay in business.
JEFFREY BROWN: But, as he said, when the Federal Reserve looked at this, they set what they thought was a fair price.
RICHARD HUNT: OK, well, that’s half the story. The Durbin amendment only allowed us to recoup the cost for the actual transaction, not for development of the card, not for processing, not for marketing, not for the call center. That would be like McDonald’s only being able to charge for disbursing the Coke, but not ordering the Coke or marketing the Coke.
JEFFREY BROWN: Mr. Lazarus?
DAVID LAZARUS: There are so many moving parts to this. Bank of America says that they will lose about $2 billion in revenue as a result of this. But they’re not saying they are going to lose any money.
What they are in fact saying is they are going to make less money as a result of this. And so they are really trying to make good to their shareholders at this point with this $5-a-month or $60-a-year fee that’s going to be imposed.
And let’s look at the numbers. B-of-A says that this is going to put them down $2 billion, but they have got 57 million consumer and small business accounts. Now, if just a majority, not all of them, just a majority use debit cards, that means they are going to have a windfall of $3 billion.
So they come out a billion dollars ahead out of all of this. Where is the fairness in all of that?
JEFFREY BROWN: Well, Mr. Hunt, so is it making less money or making money at all?
RICHARD HUNT: Sure it is. Look, we want to give people free checking accounts. Unfortunately, we can’t do that anymore. Decades of generations have seen free checking going forward. That is not going to be the case anymore.
We want to make sure the customer is happy. We want to keep customers at our banks. There are 7,100 banks in this country. We surely know that if a customer is not happy, they are going to go across the street to another bank and open a different checking account. We want to keep them at our banks.
JEFFREY BROWN: How much does it cost to process a debit card transaction?
RICHARD HUNT: Well, if you go from A to Z, from the very beginning to the very end, it is somewhere around 35 to 36 cents. If you listen to Sen. Durbin, where you can only recoup the cost of the actual transaction at the actual point of sale, where Michelle Obama went to Target yesterday, in Alexandria, Va., that is a whole lot less.
But there is a whole lot more to the transaction than the point-of-sale transaction.
JEFFREY BROWN: Including what?
RICHARD HUNT: Making the card, the fraud cost, distribution of the card, the 800 number, all sorts of factors.
JEFFREY BROWN: So your sense is that the Fed figure of 21 and the lower figure that he just raised is wrong, punitive, or what?
RICHARD HUNT: Yes and no. The Fed was instructed by the Congress what they could calculate in their fees. The Fed cannot calculate the entire set of fees, just a snapshot of fees at the very end.
Again, we do not want to charge our customers. We were forced to by Congress interjecting themselves into the marketplace.
JEFFREY BROWN: Mr. Lazarus, is it about the — figuring out the exact cost of this transaction for you? Is that what it’s about?
DAVID LAZARUS: Well, I will repeat. I don’t think anyone begrudges the banks charging a fair profit for a fair service.
But the banks are not forthcoming as to what this really costs. I think, Richard, no offense intended, just pulled that 31 cents number out of the air, especially when the Federal Reserve, no less, says that 21 cents represents a reasonable and proportional return. And yet the Fed also says the actual cost is 4 cents.
And, in fact, some consumer advocates say it’s even less. It might just be a penny or two. So these fees are pure gravy for the banking industry. And just because their revenue is coming down, well, what that means is basically when they have to charge a reasonable rate for the service, then they get a reasonable return, and therefore what they were making before was essentially unreasonable.
Now, shareholders might not like that loss in revenue, but if you are going to treat your customers fairly, then charging a reasonable and fair rate is how do you it.
JEFFREY BROWN: Mr. Hunt, as we said, this is part of a larger change here. And there are banks looking to make up fees in various ways, right, eliminating free checking, for example. Should consumer expect to pay more in coming years?
RICHARD HUNT: Well, unfortunately, they probably will have to because of the over-regulation by Congress. We knew Congress would do one of two things when you had the economic collapse. They would do nothing or they would overreact.
Remember, we had overdraft fee reform. We have had credit card reform. We now have had debit card reform. It’s an over-regulated economy right now.
JEFFREY BROWN: But didn’t they react out of a sense of what had happened in the crisis and the bailout? You know, this is why the public would be upset.
RICHARD HUNT: I understand why the public is upset.
Interchange had absolutely nothing to do with the economic collapse, absolutely nothing. It was a political maneuver by Sen. Durbin, because he didn’t believe that retailers should be charging a certain fee for a product, a benefit they were receiving.
JEFFREY BROWN: So, Mr. Lazarus, you write your column for consumers. What is your advice?
DAVID LAZARUS: Well, my advice would be — contrary to what Richard says, it’s not easy to shop with your feet, because all of the big banks are probably going to follow suit.
As you said, Wells and Chase are already experimenting with similar fees. It’s more than likely, considering the herd mentality that reigns in this industry, that they will all start charging these debit card fees once one of them gets away with it.
Your only alternative pretty much is probably going to be a credit union, and they are going to get away with the fee-free checking costs, the fee-free debit cards. The problem is, you’re going to give up a lot of convenience as a result for that. So you could say that these fees are a premium for convenience. And if the banks wanted to sell them as that, then OK. That is a little truth in advertising.
But at this point, consumers are going to have to make that choice between convenience on the one hand and low fees on the other.
JEFFREY BROWN: And, Mr. Hunt, do you expect this to have an impact on consumer use of debit cards or other behavior?
RICHARD HUNT: Sure, I think it will.
A couple of years ago, when Congress redid the Credit Card Reform Act, they shifted people to the debit card. And I think that was the right decision for Congress to do and for the marketplace. I think what is going to happen now, people are going to have to go back to credit cards. Hopefully, they will have better financial positioning by paying off the debt.
This is not just a large-bank issue. This is a credit union and small bank issue. You are going to see thousands of small community banks go under because of regulation by Congress.
JEFFREY BROWN: All right. We will keep watching.
Richard Hunt, David Lazarus, thank you both very much.
RICHARD HUNT: Thank you.