A move by Bank of America to start charging a $5 monthly fee for debit card purchases appears to mark a new trend for larger banks, and perhaps creates opportunities for smaller institutions promoting their own debit card rebate programs.
On Sept. 29, Charlotte, N.C.-based Bank of America (NYSE: BAC) announced it would implement a monthly debit card fee in early 2012.
Regions Bank, Wells Fargo and Chase Bank already have made moves to retrieve revenue they expect to lose under Dodd-Frank Act regulations – namely cutting by half the amount banks with more than $10 billion in assets can charge merchants in debit card transactions. Regions Bank, for instance, on Sept. 24 began charging $4 per month for debit card use by customers with its least expensive checking accounts, which cost $10 per month, according to spokesman Mel Campbell.
Effective Oct. 1, the interchange fee on debit card purchases is capped at 21 cents, plus five basis points per transaction or .05 percent of the transaction value, according to the Federal Reserve Eighth District office in St. Louis.
The average for interchange fees collected by banks last year, according to a draft version of the new rules, was 44 cents per transaction.
Bank of America spokeswoman Betty Riess said bank officials have estimated the new rules will cost Bank of America $2 billion in annual revenues. The bank recorded $134 billion in 2010 revenue.
“The economics of offering a debit card have changed with recent regulations. The price of a debit card was previously determined by the amount and type of transaction. We were able to pass along some of those costs to merchants, but because of regulatory changes, we are adjusting our pricing to reflect today’s economics,” Riess said.
At least two financial institutions operating in the Springfield market quickly responded to the bank trends.
Springfield-based CU Community Credit Union and Bentonville, Ark.-based Arvest Bank issued news releases touting rewards programs for debit card users. Arvest, which has assets in excess of $11 billion, is sticking with its program despite being subject to the interchange cap.
“We considered a number of options knowing (regulations were) coming down the pike,” said Rodney Shepard, president of Arvest Bank’s Springfield market. “We’ve chosen to stay with free checking. We’ve chosen not to charge for debit cards. We believe our customers see value in those products.”
Shepard said he hopes its debit card rewards program, which offers points for purchases that can be redeemed for gift cards at places such as Bass Pro Shops or Wal-Mart, will attract customers from larger banks. In addition, on Oct. 3, the bank announced it would drop its overdraft fees to a flat $17 for all accounts beginning Nov. 7.
CU Community Credit Union President Judy Hadsall said its CashCard program rewards customers who use the card as a credit card – which is more profitable for the institution – instead of punching in the personal identification numbers.
“We wanted to do something different than the other institutions out there are doing,” Hadsall said. “We’re trying to increase transactions.”
With a growing number of consumers frustrated by fees, she said the credit union’s strategy is to incentivize debit card usage to generate revenue and compete against larger banks.
As a card issuer, Hadsall said the credit union, which has roughly $71.6 million in assets, makes 16 cents more per transaction, or 41 cents per swipe, when customers sign on the line to complete a purchase instead of punching in their PIN. When the card is used as a credit card, it typically cuts out the middle men.
“Basically, the merchant pays a fee for every (noncash) transaction that occurs, and that fee is divvied up among several players,” Hadsall said.
Companies such as Visa and MasterCard receive a portion of the fee, she said, while regional networks such as Pulse or Star can take a piece of the pie, as well. “And then we’re on the tail end as the issuer,” she said.
Neither Shepard nor Hadsall were surprised Bank of America and other large institutions are implementing new charges.
“If they are used to getting 44 cents per transaction and now they’re making 21 cents plus, they’re going to make it up somewhere,” Hadsall said.
Hadsall is hopeful the new regulations will benefit smaller banks and credit unions, but she’s skeptical, too. She said as new rules emerge from the Consumer Financial Protection Bureau – which was created by the legislation that established the cap on interchange fees – she thinks all financial institutions might have to adjust and change their strategies.
Bank of America’s Riess said customers would not be charged for automated teller machine services, and account holders with minimum monthly balances of $5,000 would not be charged for debit purchases. She said customers who do not use their cards to make credit or debit purchases would not be subject to a fee that month.
“We are very committed to being clear and transparent about fees and giving customers choices,” Riess said, adding that customers subject to the fee would be notified 30 days in advance of its implementation.[[In-content Ad]]
Adrianna Norris became a first-time business owner with the opening of Finley River Chiropractic; PaPPo’s Pizzeria & Pub launched its newest location; and Huey Magoo’s opened its second store in the Ozarks.