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3Qs: Registering the fallout of new debit card fees

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Last week, Bank of America announced that it would follow other banks in charging customers a monthly fee for making purchases with their credit cards — leading to outrage from its customers. We asked Coleen Pantalone, associate dean of undergraduate programs and associate professor of finance in the College of Business Administration, to explain why more banks are imposing such fees and share her thoughts on the public’s reaction.

What has led big banks like Bank of America, Chase and Wells Fargo to implement new monthly fees for debit card users?

Banks with more than $10 billion in assets, like Bank of America, Chase and Wells Fargo, are reacting to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law reduces the amount that these big banks can charge stores and retailers for each debit card purchase from 44 cents to 24 cents — almost a 50 percent cut. This is a significant amount of revenue to lose, and these banks are looking for ways to make it up. One obvious way is to charge the debit card users directly, rather than charging the stores where the purchases are made, and this is the solution these banks have proposed.

What will be the impact of the new fees? Will customers look to find new banking services, switch to credit cards — or will they just accept the new monthly charge?

The new fees will add to the cost of banking for many consumers. Bank of America, for example, says it will charge up to $60 per year. The interesting thing about the Dodd-Frank legislation is that it only applies to big banks. Small community banks can still charge stores more than 24 cents, and they are making a point to let consumers know that they are not adding fees. I expect many consumers will look to find new banking services and others may switch to credit cards. It isn’t that easy to switch banks. If a consumer has automated bill pay, for example, all those accounts have to be changed. Direct deposit of paychecks would also have to be changed. Therefore, it won’t be easy to switch, and some consumers will just give up and accept the added cost. 

How have consumers reacted to additional fees for services in other industries such airlines, car repair, and so forth? How are banking services similar or different?

There has certainly been a strong reaction to this fee announcement. In part, I think, consumers feel duped. Banks have been pushing debit cards as a way to do banking business, and they have been doing that because it is cheaper for the bank than paper checks. Now consumers are used to using the cards, and then the banks add fees. Additionally, consumers have been feeling pressure on all sides — the housing market is still down, unemployment is high, interest on savings is very low — and companies seem to be nickel and diming them with new fees and charges.

The uproar over NetFlix’s new pricing scheme is another recent example of consumers feeling like they are being used. The difference between a bank and a company like NetFlix, or the airlines with their baggage fees, is that consumers need to have banking services. They can give up NetFlix and carry on their luggage to avoid fees, but they need to have a bank.