Details And Transparency Matter As Banks Introduce New Debit Card Fees

While many news sources reported about the plan by Bank of America (BofA) to charge its customers a new $5.00 monthly debit-card fee starting next year, details seem to be scarce. Early reports were short on details, such as this Chicago Tribune report on September 30:

"Customers will pay $5 each month they use a debit card for a purchase. No charge for using BofA automated teller machines. Fee to be phased in starting early next year. Doesn't apply to customers with, for instance, a BofA mortgage or $20,000 in combined BofA and Merrill Lynch accounts..."

As a bank customer, I want to know:

• The exact start date in 2012 the new fees start
• Which checking account customers will be affected
• The rollout schedule (e.g., nationwide or selective by state) for the new fee
• Ways to avoid the new fee
• The actions, if any, the bank took to try to avoid charging customers the new fee

Supposedly, customers who use their debit cards only at ATM machines would not be charged the new monthly fee. Now that BofA has raised the issue of monthly debit-card fees, other banks are considering similar new fees. MSN Money reported:

"Wells Fargo begins testing a $3 monthly fee on Oct. 14 in Georgia, Nevada, New Mexico, Oregon and Washington; JPMorgan Chase is testing a $3 fee in Wisconsin; Regions Bank will impose a $3 fee beginning Oct. 1; and SunTrust is already charging a $5 monthly fee for using a debit card."

USAA Bank used these events as an opportunity to emphasize that its checking and debit-card accounts will remain free.

To learn more so I can decide what to do, I visited the Checking Accounts section of the BofA website to read about the new fee. It didn't mention the new fee. I also checked the BofA online Newsroom which did not include any content or press releases about the new fee. When I signed into my online BofA account, the website didn't display any notices about the new fee.

So, I visited a local BofA branch to learn more. The customer service representative I spoke with was very polite and asked me what I knew. I summarized the news reports I had read and asked her for details. She mentioned that the new fee will apply next year to debit-card customers with basic checking accounts, who use their debit card for purchases. I explained to her that I do not use my debit card for purchases due to skimming devicies at many retailers, such as supermarket terminals and gas station pumps.

She then explained briefly that customers with premium and platinum level accounts would not be charged the new monthly debit-card fee, even when using their debit cards for purchases. There was nothing in writing, and the chart of various checking account plans she pointed to did not mention the new fee.

She then asked for my account number so we could review my account. It turned out that I have a Platinum level account, so my account won't be charged the new monthly debit-card fee. While this was good news for me, I know that not everyone has a premium-level account which exempts them from the new fee.

Regardless, I feel that BofA has done an extremely poor job of communicating details about the new debit-card fee to its customers. Maybe other banks have done a better job. BofA used the news media instead of communicating directly to customers, first. Either a bank values its customers or it doesn't. I have the impression that it doesn't.

The BofA hasn't disclosed what percentage of its customers will be affected by the new fee. My guess: Most. After preforming several online searches and reading through at least 16 news reports, I finally found this Time Magazine report which confirmed what I had heard:

"In an email, BofA spokeswoman Anne Pace said the fee applies to MyAccess, Essentials, eBanking and Enhanced accounts. Customers with Platinum Privileges, Premium and Advantage accounts won’t have to pay the fee; these are all accounts aimed at customers with five-figure balances or other big-ticket ties to the bank like a home mortgage. “In addition, Wealth Management/Merrill Lynch and US Trust clients will not be charged the fee...”

So, if you have are rich, have a mortgage or investments with, or have several accounts with BofA, you can avoid this new fee -- and many other fees. If you are poor or don't have much money, well tough luck.

Many BofA consumers are concerned. Some are furious. Some feel resentful because the BofA and other banks received bailouts during the recession, and senior bank executives have received huge bonuses and compensation.

Some view this new fee as expensive. Given high employment in many parts of the country, I agree with this. About 120,000 BofA customers in 50 states have signed an online petition demanding that the bank cancel the new fee.

Some BofA customers have moved their money to local community banks or to credit unions. One Arizona credit union has seen a 20% increase in new applications over the weekend. I would imagine that a larger number of customers are considering a move of their money to a community bank or to a credit union.

I contacted BofA's Public Relations department about this. Spokesperson Betty Riess emphasized the bank's commitment to transparency and clear communications. She mentioned that, "... it's still early on" and the new fee wouldn't start until "early next year." She said that the bank would notify affected customers at least 30 days before the new fee goes into effect, and that the new fee would be rolled out in phases across the country.

Just to be clear, I am not defending any of the banks that plan to charge this new monthly fee. While banks have a right to make a reasonable profit, we consumers have a right to demand quality customer service at reasonable prices. We consumers have experienced lots of price hikes, starting with huge credit-card interest rate increases in 2009. And, the debit-cards distributed by American banks use obsolete technology.

Frankly, the banks have broken consumer trust. BofA hasn't provided me anything in writing about the new debit fees, so they could still change the terms of deal between now and next year. This situation does not promote trust.

What else might be going on? The issues I see:

1. Double Charges
2. Lack of Transparency

Double Charges

Consider this: Online transactions are what make the Internet go. In other words, electronic payments are what make buying and selling on the Internet possible, and attractive. With this new fee, banks are screwing around with the electronic economy.

Think of it this way: When you use your debit card to pay online at a retailer's website, the new debit-card fee adds a cost to that transaction for consumers, even though the cost of that online transaction was, in theory, already included into the cost of the retailer's product or service. You could say consumers are getting charged twice.

The double charges definitely apply if retailers don't lower their prices commensurate with the new, lower swipe fees. Will retailers lower product prices given the lower debit-card swipe fees?

The National Retail Federation commented about this, since its members benefited from the legislation that lowered debit-card swipe fees:

“Retailers across the nation are developing a wide range of innovative ways to pass these savings along to their customers with lower prices and better value... Change won’t come overnight, but consumers will definitely benefit... Every time Congress takes a step to protect consumers, the banks use it as an excuse to raise fees. We’ve seen it when Congress limited late fees and overdraft fees and now we’re seeing it with swipe fees. Just as merchants and consumers are about to get some relief, they’re doing it again. That doesn’t mean Congress shouldn’t pass consumer protection laws. It speaks more to the nature of the card industry than to whether swipe fee reform should have been passed.”

I am hopeful that retailers will lower their prices. Lower prices mean greater product sales. And greater sales could translate into more jobs for consumers. So, we'll see during the coming months what happens. If retailers don't lower their product prices, then consumers have been "mugged" yet again.

Lack of Transparency

Since the previously higher swipe fees were paid to the banks by retailers or merchants, the banks seemed to have made a calculation that since they can't charge merchants more, they can charge consumers more to make up the lost revenues. This caused me to think about who receives the debit-card swipe-fee revenues.

So, I searched online for "merchant services," since that is the business function where banks provide banking services to businesses. One link I found was the Merchant Services section of the BofA website, where BofA provides checking accounts to businesses. That read like pretty standard stuff.

A more interesting link I found was a link to a description of "Banc of America Merchant Services LLC" at the Hoovers website, which stated:

"The next time you swipe your card and it clears, you might thank Banc of America Merchant Services. A 2009 joint venture between Bank of America and First Data, it is one of the largest processors of electronic payments in the US. The firm handles more than 7 billion check and credit, debit, stored value, payroll, and electronic benefits transfer card transactions..."

When banks claim that the "economics of debit cards have changed," it's a reference to the banking legislation that capped swipe fees at about 21 cents per debit transaction, from a prior high of 43 cents. Does each online transaction really use 21 cents worth of electricity? I doubt it. Are their administrative costs that high? I doubt it. If their costs are that high, what are they doing to lower those costs? And if they aren't doing anything to lower those costs, then maybe they shouldn't be in business anyway.

So, the BofA outsources its debit-card transaction function to another company: Banc of America Merchant Services. Many consumers might be surprised to learn that BofA outsources this function to another company. Companies often claim that outsourcing is done to lower costs, but in this instance that doesn't seem to be the case, since this outsourcing isn't discussed.

My point: BofA partnered with another company to create a separate company that actually processes debit-card transactions, and it shares in those debit-card transaction revenues. Some people might call this double-dipping. I recognize its partner's name from prior blog posts: First Data.

This raised more questions for me than it answered. I now wonder who gets the revenues from the new debit-card fees the banks plan to charge consumers. Does the revenue from this new fee go to the BofA or to Banc of America Merchant Services? Or does it all go to First Data?

Also, there is the ethical question: Is it right for banks to charge consumers for a transaction function that previously was a merchant services function? It seems to me that the banks should resolve the profitability of their merchant services operations between themselves, transaction processors, and merchants. How might banks do this?

The banks seem very creative at introducing new fees. The banks could have created another new fee for their merchants, and charged merchants directly with this new fee. Or the banks could have lowered their internal costs by outsourcing to different vendors. Perhaps the costs the banks pay to outsourcing vendors for debit transaction costs is too high.

I asked Riess about this and she said that the debit-card fee revenes go to the BofA. She didn't elaborate beyond that general answer. She said she couldn't discuss what actions BofA might have taken to lower its costs before adding the new debit-card fee. She said that she couldn't discuss the questions I raised about Banc of America Merchant Services. I don't know if she couldn't discuss due to a lack of knowledge, or an internal directive.

Consumers might want to ask their banks to explain what debit-card transaction processing venture their bank engages in, and exactly where the money collected from debit-card fees go.

I am not a banking expert, but something funky is going on. It just doesn't pass the smell test.

It seems that rather than try to lower their debit-card transaction costs, the banks "punted the football" and simply want to charge consumers to make up the lost revenues, without explaining to their customers first:

• Their debit-card transaction processing ventures,
• The steps they have taken to cut costs so they don't have to raise prices, and
• The steps they have taken to make up their alleged revenue shortfall with merchants rather than with consumers

This lack of communication indicates that the banks are not being honest nor transparent about what is really going on.

What else might be going on? The New York Times reported:

"Bank of America probably has bigger problems than any of its competitors. So it stands to reason that it would make a bolder move. After all, it is dealing with a pile of troubled mortgages, legal fallout from the sales of bonds made from those loans and questions about how it serviced its home mortgages."

Perhaps, but this does not give the banks a free pass on the questionable merchant-services revenue situation I described above. I'd like to see BofA and its executives act in a more respectful and transparent manner to customers. That means communicating to customers first about what is happening, and acting in an accountable manner for past decisions (e.g., Countrywide, foreclosure documentation shortcuts) without penalizing its customers for poor decisions its executives made.

Resources

If you have decided to move your money out of BofA or your current bank, MSN Money advises consumers to look for banks with "switch kits," and to follow these five steps:

1. Choose your new bank
2. Open your new bank account first
3. Change your direct deposit
4. Close your old bank account after all outstanding checks have cleared.
5. Set up automatic payments online at your new bank

More resources to help you find a new bank:

• Move Your Money project: website, Facebook
• Checking Finder
• Consumer Reports: Free Checking

What is your opinion of the new debit-card fees? Or about the double charges and lack of transparency? If you have moved your money to a community bank or credit union, share your experience below.

Comments

[ChristineE]

With respect to the below argument, that the banks could simply charge merchants instead of customers, that actually isn't true any longer. The Durbin Ammendment portion of the Dodd-Frank law specifically limits the amount of merchant processing fees that banks and processors can charge. Many people have argued that this loss of income (along with the loss of income that resulted from the law's limitation on consumer overdraft charges) is the catalyst for the new fees BOA and other banks will be rolling out to debit card customers.

"The banks seem very creative at introducing new fees. The banks could have created another new fee for their merchants, and charged merchants directly with this new fee. Or the banks could have lowered their internal costs by outsourcing to different vendors. Perhaps the costs the banks pay to outsourcing vendors for debit transaction costs is too high."

[George]

ChristinE and readers:

Thanks for the feedback. If we are to discuss the Durbin Amendment of the Dodd-Frank law, then please provide a specific link, page number, and/or paragraph number that supports your statement, so readers can evaluate for themselves. HR 4173 is here:

http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.4173:#

And, in a related article:

Another Reason to Break Up the Big Wall Street Banks: Bank of America’s Outrageous Debit Fee
http://blog.buzzflash.com/node/13065

Thank you.

George
Editor
http://ivebeenmugged.typepad.com

[ChristineE]

Thanks, George. I will certainly post a relevant link in any future comments.

Best regards,

ChristineE

[durbin amendment summary]

Thank you George, I also believe the people of Bank of America should act in a more transparent manner in order to get the people trust again.