Last month, I noted that Wells Fargo was to begin testing a $3 debit card monthly fee in some areas of the country. Since the recession, banks are looking for more ways to generate profits from depositors. Historically, banks turned deposits around and approved loans for borrowers at higher interest rates than what was paid on deposits, but with loan interest rates remaining low, the financial industry is not satisfied with current profits.
Banking Deal: Earn 1.55% APY on an FDIC-insured savings account at CIT Bank.
More recently, banks have benefited from swipe fees or interchange fees, where card issuers receive a small payment for every transaction. These fees have been a significant source of revenue for banks; in fact, the cost for banks to provide merchant services is significantly less than the revenue from fees. As a result, new regulations, intended to help small business owners who absorb the cost or pass it onto customers in the form of higher prices, enact limits to interchange fees. The most obvious solution to a squeeze on revenue from one source is to find another willing source.
In this case, banks are beginning to charge depositors directly.
Bank of America is initiating a new monthly fee of $5 for debit card use. Regardless of whether a Bank of America customer uses a debit card in “credit mode” (usually a signature-based transaction, though in some situations signatures aren’t necessary) or in “debit mode” (a PIN is required), as long as he or she has one transaction in a month, the bank will deduct $5 from the account at the end of the period.
While there is something to be said for customers paying a service provider — a bank — for the services it provides — immediate access to their money stored safely in checking and savings accounts, this isn’t the model for savings and checking account access the country has come to accept over the past century.
The good news is customers still have choices.
Unfortunately, many Bank of America customers will continue blissfully unaware that there have been any changes. Some will notice the new $5 fee after receiving the first statement after the debit card fee has gone into affect, and some will notice months later — or perhaps never. Perhaps this is justified punishment for not managing finances closely. Some will know about the fee but not care enough to make any changes. $60 a year on a $30,000 annual income is not a significant expense at 0.2% of income.
If, however, you keep an average of $1,000 in your checking account, a fee of $60 a year is 6% of your balance. That is an insane fee considering the benefit the bank provides. You’re better off — much better off — with any alternative.
Carry around cash. While this will save money from a few different perspectives, it is not an ideal situation for everyone. If you regularly make a lot of transactions and need to carry a significant amount of cash on your body at all times, you’re putting your cash at risk, whether the risk comes from a capacity for misplacing your wallet or getting mugged. Another benefit is that on average people spend less with cash than they would with plastic due to the psychological effect of taking bills from your wallet and giving them to someone else.
One potential drawback, especially for spenders who are aware of the psychological disadvantage and work to control their spending with plastic, is they lose the benefit of receiving statements outlining their spending. For someone who tracks her finances, that might mean keeping a collection of receipts and making notes in a pad whenever she doesn’t receive a receipt. Cash is an accounting nightmare.
- Switch banks! This is an approach I highly recommend. It would take a significant amount of customers to send a message to a bank by closing accounts and taking their business elsewhere. I don’t expect banks who have chosen to implement these debit card fees to ever go back to the free model. Many banks, particularly smaller regional and local banks, have not begun nickel-and-diming their best customers. Credit unions, as well, pride themselves on being customer friendly; after all, the shareholders of credit unions are their customers, so there is no friction between the institutions pitting the needs of the owners against the needs of the customers.
Go and do it today. It will only take a few minutes; move your money out of any bank that plans to charge a monthly fee for using your debit card, which as of today includes these major banks:
- Bank of America
- JP Morgan Chase
- Wells Fargo
There’s a new initiative called Bank Transfer Day, encouraging consumers to pull money out of big banks and into credit unions by November 5, 2011.
Updated September 24, 2015 and originally published September 30, 2011.