Yo Mama’s Mad About Debit Card Fees

by JT McGee

Monthly debit card fees tick people off.Straight out of the Apocolypse, the personal finance blogosphere is abuzz about new monthly debit card fees. Oh the horror! Fees for convenience! Say it ain’t so!

Yes, banks are rolling out new debit card fees as a monthly cost to consumers. Why? Well, if I were in the business of lying to you, I’d say it was because banks are greedy scum who rip people off.

But that’s not the real answer. The real answer is that government has nothing better to do than regulate business rather than seek to understand it. It’s only logical that a government comprised of ex-lawyers would recommend laws as a solution to each new “problem.”

Why are banks charging debit card fees?

I have three answers for yo momma:

1. FED caps on point of sale fees – The Federal Reserve said, “sorry mama, but transaction fees are too damn high.” With the stroke of a pen, it was done. Fees were capped at 21 cents per transaction plus .05%.

2. No Yield, Bro – Yo mama is a money loser for banks. In case you haven’t heard, interest rates are at record lows, which means banks are paying you practically nothing to borrow your money, but they’re also earning practically nothing on yo mama’s accounts. Fixed costs plus lower variable revenues means yo mama gets the screw.

3. Basel III – Since making money is risky business, the government concluded that yo mama doesn’t need returns, just preservation of capital. Banks should keep less of their money in investments that generate positive yield and instead invest it in the furniture industry put it under a mattress.

Free Checking with $500,000 Mortgage

Until rates rise, the earnings banks achieve on savings will stay near zero. While $3-5 monthly fees sound like a bunch of nonsense, you don’t have a choice. Banks operate on what is called net interest margin. Net interest margin is about as real as a unicorn right now.

Yo mama needs to get serious. Banks can’t legally make money when…

1. People spend money
2. They invest other people’s money

So what did yo mama expect?

Do you want to work for free? Bankers don’t. Is that so bad?

{ 13 comments… read them below or add one }

PKamp3 October 5, 2011 at 09:22

Here’s a theoretical: is it actually better for some of the costs of debit card usage to be passed back to debit card users? I’ve seen the argument used against credit cards: since there are transaction fees baked into the prices of every item, people who don’t use credit cards are subsidizing those who do – with the possible exception of gas stations, which seem to enjoy flaunting their cheaper cash prices. Now, working in retail (a while ago) I saw firsthand that cash itself isn’t a free form of payment – cash has a tendency to wander off and often requires an armored car to transport.

Now, I’m not a fan of the mechanism for exposing those fees – I’d prefer the government not dictate the exact amount of money a transaction can make a bank (I’m surprised some people are okay with it), but theoretically it’s not the end of the world. ~22 transactions a month is where BoA breaks even with the new caps.

Lucky for me, my mom will just use her credit cards.

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JT October 5, 2011 at 10:59

Is it better? I have no idea. Obviously the decision creates several negative outcomes, one of which is that, thanks to a restructuring of fees, the people who use debit cards the least subsidize those who use them the most. Additionally, more people will go unbanked, giving up valuable checking accounts because the monthly fees make it far from economical.

Where do you come up with the 22 transactions per month figure? I know that on your blog you have a post about the same topic, in which you used the average value of each debit card transaction to find break even. The median would be far more valuable, because fees were based on a flat-rate plus a percentage. Average doesn’t tell us anything about volume, which is paramount to understanding how individual firms benefit/lose from this change.

The median and standard deviation would allow for a proper revenues analysis, but I don’t know where I’d find that information without spending 6 hours Googling over and over again.

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PKamp3 October 5, 2011 at 11:25

JT,

Thanks for the followup. The best I can do is find bank mean, median, and standard deviation costs for the various card-type transactions. I didn’t dig into the data too hard, but Table 4 is the juicy one (page 367). http://www.federalreserve.gov/aboutthefed/boardmeetings/20110629_REG_II_FR_NOTICE.FINAL_DRAFT.06_22_2011.pdf

In my first article I was trying to figure out debit swipe volume per customer – which is a tough nut to crack. You can sort of take a guess at it with the revenue numbers BoA helpfully spun out in their report. I also have no idea what sort of attrition BoA is expecting due to the new fee. (Short answer: .44x = .21x + 5, haha).

And you’re right – debit cards have a lower barrier to entry than credit cards and a lower income and wealth clientele. We’re exposing them to costs that were borne by all customers before, so it is definitely poorly targeted from a ‘progressive vs. regressive’ standpoint (if that’s the concern). I don’t know how the market will shake out, but “it would be nice” to see some of those customers move to some of the lower cost options like online banks and credit unions.

Of course, BoA > Citi since Citi is going to tag all of their low-balance users with a $20/month fee. Rough!

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JT October 9, 2011 at 16:50

Yeah, I don’t know how Citi even begins to justify $20 a month. I bet they did some modeling and figured that $20 would tick enough people off to leave entirely (preferably people who still get statements by mail, as they are very costly) yet still leave enough people that will just get drained by the fee.

Progressive vs. regressive is a very big concern for me, especially since I was softened by the reality that 25% of households don’t have a checking or savings account as it is. We can’t even begin to affect financial literacy until people have a means to safely, conveniently, and inexpensively save money in this country.

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Ashley @ Money Talks October 5, 2011 at 11:26

I understand the new charges, but I don’t think they will help the bank make money. I think most people will stop using their debit card and avoid the fee. So those who use credit cards will depend more on them for their everyday purchases, or people will use cash.

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JT October 5, 2011 at 18:34

No joke, I still don’t have a personal debit card. I had a credit card before I had a single debit card, personal or business. Who needs ’em anyway?

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funancials October 5, 2011 at 14:15

I disagree Ashley, the banks will certainly make money. People will bitch and moan for a few months but ultimately they will do the only thing they do better than complaining, which is nothing. Very little action will be taken.

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JT October 5, 2011 at 18:35

Comment of the year for this “People will bitch and moan for a few months but ultimately they will do the only thing they do better than complaining, which is nothing.”

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Norman October 5, 2011 at 16:56

I agree with funancials. I have a friend who goes to the casino and he likes to get his cash out of an ATM at the casino that charges a rather large fee for the privilege. Apparently he does this so he can deduct that money against his winnings. When I asked him if he had a problem paying such a large ATM fee to get cash, he said that at first he did, but he got used to it. People get used to paying for convenience. They will complain at first, then keep using their debit cards for the convenience.

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JT October 5, 2011 at 18:31

I think this is probably the most likely outcome. I mean, it’s not like the average American is going to actually check their bank balances. 😉

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LaTisha @YoungAdultFinances.com October 5, 2011 at 17:35

I don’t care why Bofa is whining and complaining. They got a bailout and now they want to spit in the face of the taxpayer who gave it to them. I think it’s a bad business decision. They can make money with loans if they would actually make some. Last I checked they were sitting on a vault of balance sheet padding Scrooge McDuck style.

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JT October 5, 2011 at 18:29

Wait, wait, wait. You’re telling me that BAC and other banks are the reason debit card fees are going up? You’re kidding, right?

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LaTisha @YoungAdultFinances.com October 5, 2011 at 20:29

Well, it’s definitely a side effect of the law but nobody said that they had to raise debit card fees to make up for that lost income. All of it eventually falls on the consumer anyway but the 5 dollar monthly fee is more than enough to cover what they would have made.

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