NEW YORK-- As the October 1 deadline for new interchange fees arrives, more details are coming out about banks' and card companies' plans to deal with the loss of income. Bank of America Corp., the largest U.S. bank by assets, plans to charge customers a $5 monthly fee for making debit card purchases starting early next year, according to an internal memo sent to bank executives Thursday obtained by Dow Jones.
The fee will apply to customers with various checking accounts during any month they use their debit card to make a purchase. The fee will not apply to customers who do not use their debit card to make a purchase or who only use it to make ATM transactions.
Bank of America is trying to cushion revenue losses it expects to incur from new caps on the fees merchants pay when a customer uses a debit card at their stores, said the report. In June, the Federal Reserve Board finalized rules capping such fees at 24 cents per transaction, compared with a current average of 44 cents.
Bank of America has said it expects the caps, which take effect October 1, to erase $2 billion in revenue annually. The caps, which apply to banks with $10 billion and more in assets, could wipe out $6.6 billion in annual revenue for banks, according to the report, citing an August report from Javelin Strategy & Research.
"The economics of offering a debit card have changed with recent regulations," a spokesperson for Bank of America said in a statement Thursday.
"This new fee allows us to continue to offer the convenience of a debit card with the full range of added features customers have come to expect," including fraud protection and monitoring, special savings programs and other services, the bank's memo said.
Other banks have introduced or are testing new fees in response to the debit fee caps, which stem from a provision known as the Durbin amendment in last year's Dodd-Frank financial regulation overhaul legislation.
Wells Fargo & Co., said it will charge a $3 fee for debit and ATM cards in several states starting in October if customers use the cards to make a purchase under a pilot program. J.P. Morgan Chase & Co. has been testing a fee in a small market in Wisconsin since February. Regions Financial Corp. and SunTrust Banks Inc. have also added monthly fees for some debit-card customers.
"Every time Congress takes a step to protect consumers, the banks use it as an excuse to raise fees," the National Retail Federation's senior vice president and general counsel Mallory Duncan said in a statement in response to the Bank of America announcement. "We've seen it when Congress limited late fees and overdraft fees and now we're seeing it with swipe fees. Just as merchants and consumers are about to get some relief, they're doing it again. That doesn't mean Congress shouldn't pass consumer protection laws. It speaks more to the nature of the card industry than to whether swipe-fee reform should have been passed."
Following the Bank of America announcement, U.S. Senator Dick Durbin (D-Ill.) said, "It seems that old habits die hard for Bank of America. After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It's overt, unfair and I hope their customers have the final say."
He added, "Earlier this year the Federal Reserve determined that the interchange fees Visa and MasterCard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%. These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped. And profit they did. Bank of America hauls in billions in debit interchange each year."
"Thankfully, on October 1 that flawed system will be replaced by a more transparent and competitive market. Swipe-fee regulation will still allow banks to cover the actual costs of debit transactions, but will rein in the banks' excessive profit-taking. Small business and merchants will benefit from fee relief and consumers will benefit from lower prices. And banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works."
Meanwhile, the National Restaurant Association has issued a challenge to card companies who have threatened higher fees on small-ticket purchases: be part of the solution of reform.
"Debit-card swipe-fee reform ensures that card companies cannot continue to arbitrarily increase debit interchange rates, among other positive changes to the status quo, such as allowing businesses to set a $10 minimum for credit-card payments and offer discounts to customers who pay in cash," said Scott DeFife, executive vice president of policy and government affairs for the association. "While this is good news for many restaurant operators and consumers, not all sectors of the restaurant industry will see the savings they, and their customers, deserve under the law if card companies act on their threats of higher fees on small-ticket bills."
The Durbin amendment charged the Fed with ensuring that debit-card fees are "reasonable and proportional" to the cost of processing transactions. In June 2011, the Federal Reserve moved to cap swipe fees that merchants pay for debit-card transactions at 21 cents per transaction--less than the average 44 cents that merchants pay for debit-card transactions today, but a significant increase over the 12-cent swipe-fee cap that the Fed first proposed in December.
Following the Fed's final action, card companies have threatened higher fees on small-ticket purchases.
"The Federal Reserve acknowledged that card companies' practices have resulted in a broken market," DeFife said. "Economic data uncovered during the interchange debate pegged the average debit transaction processing costs at only four cents per transaction. In fact, as the legislative battle over the Tester-Corker amendment to undo the interchange reforms reached its final hours, Visa sent a letter to Senators offering to 'make a reduction of debit interchange to help small businesses, i.e., those with $10 million or less in total sales …' if the Tester-Corker amendment passed. Visa offered to 'lower by 35% the debit interchange rates applicable to transactions at small merchants'."
He added, "Now is the perfect time for new entrants into the debit card market to take advantage of the new rules and come in with a product that charges merchants and consumers a reasonable and appropriate rate to the cost of the transaction. We urge card companies to stand with consumers and be part of the solution of reform efforts."
Click here to view previous CSP Daily News coverage of swipe-fee reform.
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