Debit Cards, or more specifically debit card fees, have been in the news lately headlined by a Bank of America proposal to charge a $5 monthly fee—under certain circumstances.
It is widely agreed that debit cards are a safe and fast way to access money—even better than their predecessors—the ordinary check. However, there are real costs to provide access for customers in an instant, private, secure and reliable manner. This 24/7 access is provided anytime anywhere.
I guess that since a check is a tangible piece of paper, customers can ascribe value/costs to that method. Just because debit cards are electronic doesn’t mean there are no costs. Building and maintaining the infrastructure, computers, telecommunications systems, fraud prevention, staff salaries and benefits, regulatory compliance, etc creates a substantial expense—those expenses need to be covered by income.
In general terms, it costs about $250 to $300 a year for a bank to operate a checking (debit card) account. The revenues earned by banks on accounts of less than $2,000 simply will not cover those costs. The fees paid by merchants for debit card services helped pay those costs and subsidized free checking. The government has mandated that those fees are reduced by one half. In another case of unintended consequences, the reduction on the debit card charges to the merchants creates a cost shift to the debit card customer. Merchants win, customers lose. Thanks Uncle Sam.
It is not clear at this point what the right solution to this congressional cost shift will be. For one it demonstrates that the government should avoid the unintended consequences of mandating terms to the private market as consumers generally lose. I suspect there will be a number of efforts by the banking industry to find the best and most fair solution. The proposal by B of A may not survive in the market place, but a fair allocation of costs for value will be developed.
Avoid the headlines and search for What’s Going on!