New Debit Card Fees — Do the Banks Have a Case?

Banks Seek to Make up Lost Profits at Consumers' Expense

by Derek Campbell on January 11, 2012

Like it or not, there’s a good chance debit card fees will be part of your banking statement in 2012. Bank of America has already announced plans to enact a $5-per-month debit card fee beginning next year, and several other large banks are considering the same move. The question remains: is a $5-per-month surcharge justified by the convenience a debit card provides, or are the banks just helping themselves to another bailout at our expense?

If you use a debit card 25 times a month and each transaction nets the bank a reduced 21-cent fee from the merchant, that equals $4.75 in monthly profit for your bank. Under the old rules — before the Dodd-Frank Act took effect Oct. 1 and nearly halved debit card fees from an average of 44 cents — the bank would have netted $10 a month.

Previously, banks subsidized debit cards by charging heavy fees on retailers and overdrawn customers — careless cardholders typically lost $35 every time the bank covered an overdraft. In 2010, banks collected more than $50 billion this way. Under the new rules, banks stand to lose more than $10 billion a year in merchant fees and more than $6 billion in overdraft fees.

But that’s only half the story. Debit cards were developed by banks as a replacement for paper checks. When a consumer pays with a debit card instead of a check, the bank saves money. For years, banks have continued to charge stores the same price for debit and credit transactions — despite the glaring fact that purchases made with a debit card don’t involve a loan and therefore pose little risk for the bank, all while eliminating the costs of processing checks.

A banking survey from the Federal Reserve last June found that the average processing costs per customer for all types of debit card transactions, including prepaid cards, was 17 cents (not including fraud settlement or other services). If a bank’s overhead costs are 17 cents a transaction on average, and they are now capped in charging customers a maximum of 24 cents per purchase, they make a profit of 7 cents for each transaction. Apparently, that 7 cents isn’t enough, which is why Bank of America and several other big banks are experimenting with $3 to $5 monthly fees in some markets.

For heavy debit card users, the $5 fee makes some financial sense. But if you only use your debit card a few times a month, you might want to join a non-profit credit union, where you can save on service fees in exchange for giving up the convenience of a nationwide bank.

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