Could the CFPB stop a debit-card charge?

By Felix Salmon
October 4, 2011
the president, does Bank of America's $5 debit-card fee really show the need for the Consumer Financial Protection Bureau?

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Pace the president, does Bank of America’s $5 debit-card fee really show the need for the Consumer Financial Protection Bureau? Not really: the CFPB does not exist to prevent banks from charging stupid fees as part of a self-defeating protest against the Durbin amendment. If BofA wants to charge $5, or $50, or even $500 to people using its debit cards, then so long as it gives them fair warning, does so transparently, and is happy to see them close their accounts, it should be allowed to do so.

The fact that the fee was a mistake can be seen easily by the fact that it caused a huge uproar, while much bigger increases to Citibank’s monthly checking-account fee went largely unremarked-upon. At Citibank, the basic free-checking account now carries a $10 fee, waived if you use direct deposit or have a $1,500 average balance. And Citi’s more fully-featured checking account, which used to have a $12 monthly fee, has seen that increased to $20; in order to avoid that fee, the average balance has also been raised, from $6,000 to $10,000.

The era of big-bank free checking is over. But that has nothing to do with Durbin, and everything to do with the regulation of overdraft fees. (And, of course, low interest rates.) If banks need to charge a monthly fee in order to make money on their checking accounts, then so be it. But I do think that the current level of checking-account fees is excessive, and that charging for debit transactions is downright idiotic.

All four of the big banks have a standard checking account with a monthly fee which is waived once you keep a monthly balance of more than $1,500. At Wells Fargo, that fee is $5. At Citi, it’s $10. At Chase, it’s $12. And at BofA, it’s also $12, rising to $17 if you use your debit card.

Then there’s the next tier up, where fees only get waived once you have a significant amount of money on deposit. Again, Wells Fargo has the best deal: the minimum is $5,000, and if you drop below it, the charge is $15 per month. At Citi, it’s $15,000 or $20/month. At Chase, it’s $15,000 or $25/month. And at BofA, it’s $10,000 or $25/month — plus that $5/month fee for debit-card usage, even for people keeping a five-figure sum on deposit. That fee only gets waived once you reach $20,000 on deposit.

What expensive services are the banks providing which require fees of hundreds of dollars a year? Branches, mainly, and tellers, and paper statements. And, of course, the enormous overhead associated with being a huge global bank. It’s certainly not debit-card payments — which are pretty much the cheapest way that any customer can transact, from the bank’s perspective. It costs vastly more for a bank to process a paper check than it does for them to process a debit-card payment — so why would they charge an extra monthly fee for the latter and not for the former?

I’m all in favor of banks charging a reasonable fee for expensive services, rather than trying to hide the cost of those services in painful and unexpected charges. But my idea of “reasonable” is more or less what we charge at Lower East Side People’s: $3 a month, for people carrying a balance of less than $75 — essentially, a way to discourage people from keeping bank accounts open and unused with no money on deposit.

As for the proper role of the CFPB, one thing I’m desperately looking forward to is a simple public database of all the banks offering federally-insured checking accounts, with a very easy way of comparing the features and fees of each. It would be particularly great if the CFPB could bestow some kind of gold star on the best and cheapest products, and could thereby help steer Americans away from bad accounts at megabanks, and towards much better accounts at smaller banks and credit unions.

Although, if BofA continues to carry on like this, I reckon it’ll lose a lot of customers anyway, sooner or later.

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Comments
14 comments so far

You forgot the $5/year membership fee.

Posted by guanix | Report as abusive

You’re completely right. Cash and checks are expensive to handle for a bank. Debit cards are the cheapest way a customer can interact with a bank and a retailer.

Any decisions and fees that reduce debit card ownership and usage not only create costs for the banks, but also negative externalities to retailers who are burdened with more cash and credit card payments.

Regulation is there to keep monopoly or oligopoly power in check. Because a free market is only free as long as the power differentials in economic transactions are not too wide. So I can see an entry point for the regulator here. Unilateral use of oligopoly power to shaft the consumer, who is being protected by regulation against excessive overdraft fees is a reason to act for the regulator.

If only to send the banks the message that you are not asleep at the wheel.

Posted by Finster | Report as abusive

Agreed with all the points you’ve raised here Felix, however, I’m curious about the $3 fee for LESP and specifically, your reasoning: “essentially, a way to discourage people from keeping bank accounts open and unused with no money on deposit.”

First off, I agree that $75 isn’t that much of a balance (certainly more reasonable for a working class person than the $5K or $10K that the Universals are asking) but for someone who is really struggling, surely the ability to cash their cheque with LESP instead of going to a loan shark cheque cashing place is a compelling enough reason to maintain a checking account?

Posted by GregHao | Report as abusive

I totally agree and Felix’s point about the $75 minimum is so that someone doesn’t leave, say, 20$ in an account generating statements etc forever and incurring cost. 75$ is very reasonable to have in an account to get no fee.

But I don’t understand this uproar: vote with your feet and change banks. Everyone says “it’s so hard” I’ve done it many times in my life and it isn’t. Period. Sure it may be a pain to set up bill pay all over again, or be certain your direct deposit is changed but you have plenty of warning here. Write a check to a new back, contact your payroll dept, and open that new account and just stop using the old one. In 30 days write a check for the balance and then call them and close it. Done.

Posted by skyman123 | Report as abusive

I’ll also question your $3 fee. If a customer wants to keep $50 in a checking account and do no business, where is your expense? You shouldn’t be providing paper statements for such a customer, and if there are not transactions, there is no expense. Sounds like pure profit off those who are inconvenient to you.

Posted by Curmudgeon | Report as abusive

@Curmudgeon, because by regulation banks are required to disclose statements and notices to accounts holders regardless of account activity. After I believe five years if the account still has no activity the state in which the account is held can legally collect the funds from the account. So no, it is not “pure profit”.

Posted by iflydaplanes | Report as abusive

Are the TBTF banks a monopoloy all of a sudden? Do consumers have few choices where they can bank all of a sudden?

No. Of course not. There are nearly 9000 banks/credit unions in the United States. I defy anyone to find a town of 10,000 people that does not have 3 institutions.

What if I told you that a food distribution company that serves something like 20,000,000 people a week just raised prices 68% on some items. Should the FDA or Congress start an investigation? On Sept 30th McDonands charged $.99 for a large coke. Today it’s $1.68. The sheer audacity of it… in the middle of a recession. Think of the people… what will they do?

…oh… they will hit TacoBell instead… so no big deal.

It’s not Dodd-Frank that caused the fees on checking accounts… it’s the half trillion in poorly performing home loans that investors are putting back and Basel III cap ratios that are causing banks to push unprofitable customers out the door.

News flash folks this was the goal of the regulators from the beginning and it’s working great. In 5 years BofA, Citi, Wells will all be smaller. Felix’s credit union and my mutual community bank will be bigger.

Posted by y2kurtus | Report as abusive

so the $ they make off of investing your money in your account isn’t enough? I guess it costs alot for electicity to run the computers that count all that cash.

Posted by 99percent | Report as abusive

Agreed with everybody else here, ultimately, banks are for-protfit corporations, so it’s irrelevant 99percent whether they’re making enough. They will look to maximise the amount they can earn. However, as consumers, we have the ability to go to another bank.

However, on the issue that iflydaplanes bring up, instead of using expensive paper based statements, surely LESP can move to an electronic format for which the costs as vastly lower? Again, I’m not necessarily saying that I think free checking is a God given right or that the $3 they charge is exorbitant but was curious about the rationale that Felix used.

Posted by GregHao | Report as abusive

The Durbin Amendment is solely responsible for the wave of new bank fees. BofA and all other big banks are looking for ways to make up for lost revenues and, frankly, I can’t blame them, even as I don’t enjoy paying higher fees.

It’s been abundantly clear ever since the debit interchange limit was first proposed that it was ultimately going to hurt consumers in the form of higher fees and that is precisely what is currently happening. http://blog.unibulmerchantservices.com/b anks-discontinue-debit-rewards-programs

Posted by MJohnsonI | Report as abusive

Well, BOA is expected to make $3B on this $5 debit card fee whereas they’re projected to lose $2B based on the new interchange fees.

If the Durbin Amendment is the reason that banks are no longer sneaky about the way they go about screwing their customers, then I’m all for it. As so many others have said, consumers are perfectly free to vote with their money and choose another bank that won’t choose to charge its customers a $5 debit card fee.

Posted by GregHao | Report as abusive

I can’t imagine anybody paying $60/year for the dubious privilege of using a BoA debit card. Not in this economy. Presumably this is their way to shed less profitable customers?

Wonder if the growth in online savings accounts has contributed to this shift towards fee income? I carry a lower checking account balance than in the days before EFT transfers to higher-yielding accounts, yet the transaction costs surely haven’t changed.

Posted by TFF | Report as abusive

Charging for debit cards make some sense. It is the convenience they are paying for. The financially astute and sensitive will have no problem avoiding it, while the careless and insensitive will pay it, and some extremely sensitive poor customers will move on. The real question is what other fees will come next when it doesn’t raise enough.

Posted by MyLord | Report as abusive

Big Banks like Bank of America have huge costs to account for (not to mention their profits). That $ has to come from somewhere, hence their new debit card fees and whatever they come up with next. To avoid this, I’ve been checking out my local credit unions. For example, Obee.com, is a local community based credit union in my hometown of Lacey WA. Did you know they and other similar institutions still offer no fee debit cards? Even better, they still offer points for their rewards points systems for purchases made on your debit card. They have competitive loan rates (auto, home, personal, credit cards) and online instant application processes. Even mobile banking and more. I don’t need Bank of America or any of those oversized institutions. Surely there must be some good options in your local cities too!

Posted by ckbuster | Report as abusive
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