In response to a new federal law limiting the hidden fees that banks can charge for using debit cards, Bank of America has announced that next year it will charge $5 a month to consumers who use its debit card to make purchases. SunTrust is expected to follow suit, as are other banks.
By some, this will no doubt be seen as another example of well-intended federal regulation with bad consequences. It’s quite the opposite. In fact, conservatives ought to love the change because it enlists market forces, not the government, in protecting small business and consumers.
A quick review: Every time a consumer uses a debit card to make a purchase, the business accepting the card is forced to pay a processing fee to the bank. The previous maximum of 44 cents per swipe was far more than it cost banks to handle the transaction, which meant it was also a significant source of profit. Even better, because the fee is hidden from consumer view, banks felt no competitive pressure to lower it.
Under the new rules, the maximum fee has been cut from 44 cents to 21 cents per swipe, plus .05 percent of the purchase price. The upfront monthly fee announced by Bank of America and other banks in intended to offset that revenue loss, they say.
Suddenly, the fee that had previously been hidden from consumers is now upfront. Now consumers have a more information about what they’re actually paying to use the card, and they can make decisions accordingly.
In this case, Bank of America is facing a significant consumer backlash over its fee annoucement. Other banks have announced monthly fees of $2 or $3. Credit unions and community banks are less likely to charge the fees, and Citigroup has announced it won’t charge such a fee at all because it would be “a huge source of irritation” to customers.
“We conducted extensive surveys with our customers, and no one wanted to pay to use debit cards,” Citibank retail banking chief Stephen Troutner said.
In other words, competition!
This is not the end of “free checking” or “free debit cards,” because as Muddy Waters taught us, you cain’t lose what you ain’t never had. You were being charged for it anyway, although you had almost no idea how much or even by who. Now you know.
If Bank of America charges you $5, but Citigroup charges you nothing, where will you take your business?
Banks don’t like the rule because it empowers consumers and reduces if only slightly the information imbalance between bank and individual. It forces the market to work more efficiently.
– Jay Bookman