Finance in the News: The Debit Card User Fee, Part 1

Teaching Tip:  This is the first of two “Finance in the News” write-ups dealing with debit cards.  They can be used together or in a series for class discussions or assignments – either aimed at creating class discussion or as assignments to be handed in.

In Chapter 5 we looked at debit cards in some length.  As you’ll recall, there are a lot of advantages to using debit cards, and they are used a lot – but the costs of using them are about to change for many debit card holders.

Unintended consequences – that’s what economists call it when you do one thing, and as a result something else that you didn’t plan on happens. For example let’s look at a recent Federal Reserve Board ruling in June, 2011, that capped the debit card fees that businesses pay at 24 cents for an average debit card transaction (which is about $38), down from a current average charge of 44 cents. This is described in two articles, one in the Wall Street Journal, <a href=”http://online.wsj.com/article/SB10001424052970204138204576600800330404330.html?KEYWORDS=Bank+of+America+debit+card+5″Banks Plan New Fees for Using Debit Cards,”and one on Bloomberg.com, “BofA Plans $5 Monthly Fee for Some Debit Cards.”

For retailers this is a major victory, their fees are now cut dramatically.  For banks, it is a major loss of revenue – in fact, it amounts to an estimated loss of $6.6 billion per year in revenue. For the consumer, not much will change, but there is always hope that the cost savings will be passed on to them – but in reality, there is little likelihood of that happening.

What was the unintended consequence of this cap on debit card fees? While retailers gained, consumers lost, as banks countered their lost revenue from the capping of the retail debit card fees with monthly fees for consumer debit card usage.  At the end of September, the Bank of America announced that they were going to charge a $5 monthly fee on some debit cards.  Right now it appears that the fee won’t be charged for customers who only use the cards to withdraw cash from ATMs or who have premium Bank of America accounts.

When does all this take place?  The new fee will go into effect in early 2012, but it was most likely announced now to coincide with the Durbin amendment to the Dodd-Frank financial reform act.  This amendment, that lowers the cap on debit card fees, goes into effect on October 1st.

Discussion Questions

1.  If your debit card had a $5 monthly fee, would you continue to keep it? Be prepared to discuss this in class.

2.  Do you have a debit card, and if you do how often do you use it?  Do you use it primarily to get cash from ATMs, or do you use it to make purchases?  Be prepared to discuss this in class.

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