Bully for BofA: New Debit Card Fees!

Bully for you, Bank of America.  Bank of America's starting charging monthly fees for debit card usage to some customers. This is being taken as an "I told you so" by opponents of the Durbin Amendment, who argued that it would only result in higher costs for consumers. Actually, the BoA move is exactly what we might expect:  consumers are having to pay for their rewards. That's how it should be. They might be paying too much, but that's another matter.  So what does Bank of America's move tell us?

(1) The Market Works! On broad level, what BoA is doing is exactly what should happen if the market works. Customers who get rewards will have to pay for them. Put differently, customers who use debit will have to internalize the cost of their payment medium. BoA has not eliminated or even cut its debits rewards programs as far as I can tell (but please correct me if I'm wrong). That means if you want debit rewards, then go to BoA and pay for them. If you don't, go to USAA, which cut debit rewards rather than raise fees. That's how the market should work. (But see #3, below, about why the market doesn't work so well.) The market should bifurcate into a rewards market, where customers pay for their rewards, and a non-rewards market.  And that's what's happening. 

Yes, people got used to an entitlement of rewards points. They shouldn't have. There's no good reason for merchants to be paying for your rewards unless they get a merchant-specific loyalty benefit from those rewards.  Are you really going to patronize Chipotle and order more burritos than otherwise because you're getting frequent flier miles? I doubt it.  

(2) Or the market works more or less. While BoA's announcement is in a primitive form the cost-internalization move that we should all cheer, it's obviously not fine-tuned. For starters, it's not clear that $5/mo has any relationship to BoA's revenue reduction from the Durbin Amendment. Given that Wells is charging $3/mo, the $5/mo figure seems quite dubious. Moreover, the $5/mo is only being charged to certain customers. What this means is that there are some cross-subsidies being built into this fee. But that's between BoA and its customers who can always go elsewhere if they don't like how BoA treats them, right?  Well, keep reading... 

(3) Or just less.  Competition is seriously askew in the consumer banking market. BoA's ability to slap on another $5/mo fee is an indication of the competition problems in the banking market place. $60 in additional deposit account fees is more than a small, but significant increase in price. In a competitive market place, you can't do that without losing market share. We'll see what happens. BoA clearly thinks that it nets out positive. If so, that's a sign that we desparately need better competition in banking. It's also a sign that the DOJ was grossly (or wilfully) negligent during the 1990s and 2000s when it allowed some of the bank mergers that created the Too-Big-To-Fail banks to emerge. This includes the BoA-Fleet merger, which probably put BoA over the 10% Riegel-Neal deposit cap threshold. 

Now let me be clear. The problem in the US is not that we don't have enough banks. Frankly, we have too many. The 8000 or so depositaries in the US are an order of magnitude or two higher than in Europe, for example. And most of these are doo-hickey little local institutions. The problem is that in today's world, many consumers don't want a bank that just has a few local branches. The community institutions can offer better customers service, but they don't have the bells and whistles and the convenience factor. The problem, however, is not just that we don't have enough banks of sufficient size to offer bells and whistles; in fact we probably do.

No, the critical problem in consumer financial services is that there is not robust price competition.  We've got lots of competitors, but competition is running along the wrong axis. There isn't serious price competition in this market because there's no easy way to compare prices. Put differently, there's a serious information problem in this market. There is no easy way to compare the price of having a deposit account relationship at BoA with that of having one at Wells Fargo, much less to compare every deposit account relationship within my local area. Look at the USAA form linked above--it tries to do a comparison with some competitors, including BoA (it's from before the new BoA fee). That's a start, but it doesn't come close to showing all the differences between the account terms. And good luck finding the same thing that includes Chase, Citi, and CapOne.

Now, for all I know, the community bank a few blocks away from me has a much better deposit account deal than BoA, but the search costs of learning about that are high enough that I won't bother to find out. There's no easy source for the information, much less a standardized set of metrics for comparison. As a result, I can't compare apples-to-oranges, much less apples-to-apples. If you don't believe me, check out this Pew report detailing the difficulty in getting deposit account terms. 

What's more, even if I do know that I can get a better deal than BoA, the deposit account relationship is sticky enough to prevent me from switching unless I see major savings. Switching banks has always been a pain because of things like having to get new checks, having to wait until old checks (incoming and outgoing) clear, and the anti-money laundering know-your-customer rules. One would have thought that the shift to electronic transactions would have made this process easier. In fact, however, electronic payments have made the banking relationship stickier, through direct deposit and automatic bill payment that have to be cancelled and reestablished when changing banks.  

The deposit account is the cornerstone of all consumer financial relationships. I hope that the CFPB will make it a top priority to develop (1) easily comparable, standardized deposit account terms, (2) a comparison mechanism that helps consumer do comparison shopping among local institutions, and (3) a set of rules that maximize the transferrability of deposit account relationships. Banks should not be allowed to capitalize on consumers by making deposit accounts intentionally or unnecessarily sticky. For example, if I set up direct deposit and bill pay with one institution, I should be able to seamlessly transport that set of transactions to another institution. Were that the case, I would switch banks in a heartbeat if I were treated poorly. Instead, I, like most consumers, will suck it up unless there's something truly egregious because the switching costs are too high.

The CFPB should strive to make this market more efficient by lowering switching costs. Yes, it might costs banks some supercompensatory profits, and yes, market share might actually switch to the best competitors. Boo hoo. 

(4) Of course this is about bank profits, not consumers. If you thought for a second that the banks' anti-regulatory push was out of concern for consumers, rather than their own profits, note this language in the USAA form (and remember that USAA is one of the "good guys" in the consumer finance space):  

USAA has always returned the majority of this revenue to members in the form of benefits such as free checking accounts, ATM fee refunds and rewards programs.

Put a different way, USAA is not doing a direct pass-thru to consumers if debit card swipe fees. USAA is pocketing as much as 49% of swipe fees for itself. The language doesn't specify the percentage, but it's clearly less than 100%.  This is what merchants have always alleged--that swipe fees are too high because banks treat them as a profit center, not just a way to fund services that consumers want. 

(5) Has BoA been leaving money on the table? There are only two ways to understand what's going on with BoA:  either customers will leave BoA, in which case this is a hare-brained decision or they won't, in which case BoA's been leaving gobs of money on the table. If customers will pay $5/month for a debit card now, they would presumably have done so before the Durbin Amendment. So either BoA is making a bad move now or it hasn't been maxing out on its customers' demand elasticity in the past (which is what it should be doing). 

(6) The Big Picture. Finally, what is being missed in all the media coverage of this is the big picture. Consumer debit card fees are part of a net financial picture. If a consumer pays $5/mo for using a debit card, but saves $10/mo in lower prices from merchants, it's a net plus for consumers. We don't know what is happening in terms of merchant prices (and services)--it's just impossible to sort out the benefits of lowered interchange costs from all sorts of cross-cutting factors that affect prices. (And in any case, it's far too early to expect to see any changes.) That means we don't really know what the impact of the Durbin Amendment is here, and it's irresponsible to claim otherwise. Put another way, the story here is really about the competition problems in the consumer deposit account market, not about debit cards, which are just one part of that market.