Before we cry foul play and cut up our debit cards, let’s take a second look at these banking changes.
To recap, the Durbin Amendment limited the debit card interchange fee from an average of 44 cents to about 24 cents and spurred Bank of America to announce a $5 monthly fee on debit cards. Consumers and politicians cried foul, and big banks defended these fees as a necessary way to recoup the estimated $7-8 billion in annual losses due to the Amendment.
While recent controversy over fees in the banking industry certainly isn’t pretty, to reiterate the Godfather’s famous line, “It’s not personal. It’s strictly business.”
Free banking services and benefits may no longer be sustainable due to tightened regulations and big banks’ decreasing profit margins.
However, increasing banking fees and growing public skepticism towards banks could potentially urge consumers to be more financially-conscious and critical of their banking decisions. The end of low-cost banking could be the dawn of smarter banking.
Gone are the good ‘ol days
Consumers might be nostalgic for the days of free checking accounts, debit card rewards, and higher interest yields, but as a Bank of America spokesperson said, the industry is “adjusting our pricing to reflect today’s economics.” Waves of tightened lending, credit card defaults, home foreclosures, and federal regulations have made free or low-cost banking anachronistic in a post-Recession economy.
Reuters estimated that banks made about $38 billion in 2009 from overdraft fees alone. As the Durbin Amendment cuts into banking profits, debit card fees are one way banks are adjusting their business in reaction to regulatory overhauls.
Here’s a quick calculation from The Financial Brand: Take the 20 cent difference between the old interchange fee and the new cap, multiply by consumers’ average 25 debit transactions a month, and it comes to about $5. Hello, new debit card fee for Bank of America customers.
Debit card fees are an unintended consequence of legislation intended to rectify years of unchecked banking practices. While pointing fingers at banks, merchants, or legislation may be cathartic, it’s not constructive for consumers.
End of low-cost banking & the start of smarter banking
These fees are a wake-up call for consumers. Time Magazine polled Bank of America customers on how they will respond to the new fee and a whopping 75% of nearly 1,000 respondents said they plan to switch banks.
It’s time for consumers to walk the walk and make savvier financial choices. Here are several paths to choose from:
1) Switch to a credit union or local bank. Now is the time for credit unions and local banks to court consumers frustrated with big banks. While banks levy fees on debit cards, several credit unions and community banks are actually increasing debit rewards program and reaffirming no-fee financial products. Coastal Federal Credit Union and Randolph Brooks Federal Credit Union are essentially paying members cash back to use their debit cards. Banks such as Texas First Bank and USAA pledged fee-free debit cards over Twitter. For consumers fed up with fees, check out your local credit union or community bank. While you may not get a network of ubiquitous branches like big banks, the customer service and financial products at smaller financial institutions have a reputation for excellence.
2) Switch to an online bank. This is also a prime opportunity for online banks to get a piece of the financial pie dominated by big banks. Ally Bank and ING Direct both offer fee-free checking accounts and debit cards. Ally’s Ally Perks rewards program and PerkStreet Financial offer a cash back rewards program for debit cards, in the midst of big banks eliminating their debit card reward programs. Online banks don’t have the brick-and-mortar branches that big banks offer, but the convenience of banking online coupled with fee-free debit cards may be enough to get consumers to move their money online.
3) Switch to alternative payment methods. According to Javelin Strategy & Research, as many as 60% of consumers plan to find alternative methods of payment if their bank charged debit card fees. So consumers may stay with their bank, but ditch debit cards. Cash is the traditional fee-free option, however it lacks security safeguards. Paper checks are the payment method that would hurt banks the most since they are expensive to process, but it’s bulky for consumers to carry. Big banks are pushing prepaid cards that have costly fees attached to them. Credit cards are likely the best payment alternative because they offer better rewards-earning power, better security against fraud, and the ability to build credit; however, credit cards risk incurring debt. Credit conscious consumers should take care to check theirfree credit score to monitor their credit health, and keep their monthly balances under the recommended 30% of their total credit limits to keep spending in check.
As banks figure out more creative ways to recoup losses, consumers can accept the rising cost of doing business with their own money or walk out. Will consumers change their banking behavior and swallow the fees, or simply change banks?
In an ironic twist, the outrage over the debit card fees may actually help the banking industry and encourage consumer financial literacy. The call for better banking alternatives may lead to a more open payments marketplace, and shifts in the industry will encourage consumers to find banking alternatives–such as credit unions, online banks, or alternative payments–that are a better fit for their financial situation.
As the banking landscape changes, use online resources like Credit Karma‘s Reviews section to research financial products and the CFPB‘s website to stay on top of the latest financial changes. Also, don’t hesitate to call your current banks’ customer service and ask questions about impending changes to your account. The time for smarter banking and smarter financial action is now.
Justine Rivero is the Credit Advisor for CreditKarma.com, the pro-consumer credit advocate that helps more than 3 million consumers realize the everyday cost savings of having great credit health.
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