Debit Card Fees in 2012. Who's to Blame?

My Dad and I were talking this past Friday and he brought up the recent proposals by banks to impose fees on debit cards for consumers. So while it's still fresh in my mind and fresh on the media's minds, I thought i'd throw in my two cents. 


If you haven't heard already, banks are going to be charging their customers fees in the upcoming years for their services. Most major banks have announced that they will be charging customers fees through their debit cards. Bank of America announced that in 2012, they're going to be charging a $5 monthly fee to use their debit cards and Wells Fargo is considering charging $3 for theirs. Some banks have boasted that they won't be charging for their debit cards. However, they will attach fees on through other means or let you keep it free, but with some strings attached. 

Bank Institution	Proposed Fee’s or Charges
Bank of America	$5.00 monthly debit card charge
Wells Fargo	$3.00 monthly debit card charge
J.P Morgan Chase	$3.00 monthly debit card charge
HSBC	$2.50 ATM fees for customers using competitor ATM fees plus 35 cent debit transaction fees (first eight are free).
TDBank	$2.00 ATM fees for customers using competitor ATM fees.
Citibank	Will not charge debit fees. However, it is extremely difficult to get a free checking account.

Many politicians, especially the one's on the left including President Obama are criticizing the banks. In an interview with ABC yesterday, Obama called out the banks:

"You can stop it because if you say to the banks, 'You don't have some inherent right just to, you know, get a certain amount of profit if your customers are being mistreated. That you have to treat them fairly and transparently,'"

That's the message that is sent across by politicians and the protestors out on Wall Street. But who's to blame? Is it the banks or is it the people who called foul on the banks: the politicians?

In 2010, Congress and the President passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as a way to protect consumers from the banks that were "too big to fail". Attached to it was the Durbin Amendment. The Durbin Amendment gives the Federal Reserve the power to regulate debit card interchange fees. According to the New York Times, banks charged merchants an average of 44 cents every time you made a transaction on your debit card. The Federal Reserve mandated that by October 1st, three days ago, banks could charge merchants only a maximum of 24 cents per transaction; nearly half the cost. That's called price control.

Theoretically, price controls are designed to protect consumers from high prices (or sometimes low prices) from businesses, such as banks. The government controls the price businesses can charge for services or goods in order to allow consumers to enjoy low costs. Somehow, the government thinks that business' primary goal is to be buddy-buddy with their customers. Wrong. Businesses primary goals are to make profits and they're not gonna take a loss; they're going to find a way to make it somewhere else. And that's where fees and charges come into the picture.

According to Javelin Strategy and Research, the new law would cost the banks around $6.6 billion a year - starting in 2012. If Bank of America and other major banks are going to be restricted on how much they're going to charge merchants, they're going to make the consumer pay the cost. That's how it is. The banks aren't here to make friends. They're here to make money and they're not gonna pay a dime. 


Thought i'd make a visual to help understand how this will work, showing how the system was before the Durbin Amendment and comparing it to what is going to result from the Durbin Amendment. 

In the illustration above, the only party that is paying for the interchange fees is the merchant. The consumers pay nothing. However, in the illustration below, the government is enforcing the Durbin Amendment, allowing the Federal Reserve to set the maximum charge of 24 cents, rather than 44 cents per transactions. That's a loss of 20 cents for the banks. The banks need to make up for lost revenue, so they are proposing to charge the consumers to make up for what they can't charge the merchant. 

Price controls can ruin any economic system. It's been done since the beginning of time and it's always turned out bad, whether it's been price floors (setting a minimum price) or in this case setting a price ceiling (setting a maximum price). Either way, it can be bad for the financial system. It's just another way the government can ruin the economy. Unfortunately, politicians won't admit when they're wrong. They'll continue to blame the banks and the people will love them for it. Sad face :(

Here's an article from USA Today showing how to avoid debit card fees.