Did Congress Kill the Debit Card?

The Atlantic

Daniel Indiviglio - Daniel Indiviglio is an associate editor at The Atlantic, where he writes about the intersection of business, finance, economics, and politics. Prior to joining The Atlantic, he wrote for Forbes. He also worked as an investment banker and a consultant. More

Did Congress Kill the Debit Card?

Sep 30 2011, 9:32 AM ET 615

Some Americans are outraged that Bank of America intends to charge its customers a $5 fee for using their debit card. And simply switching banks might not help: others are expected to follow. While frustration over yet another bank fee is understandable, this one should surprise no one. Congress acted to cap the debit fees that banks could charge retailers last year, and banks are reacting by directly charging their customers a portion of these lost fees to make up the difference. The move could mean the end of the debit card.

The Logic Is Simple

Bank of America is actually being quite straightforward about its rationale for instituting this new fee: it blames the government. A provision from last summer's financial regulation bill promoted by Sen. Dick Durbin (D-IL) capped the fees that banks can charge retailers when customers pay with debit cards. The new rule goes into effect on Saturday. Andrew R. Johnson at the Wall Street Journal reports:

Bank of America has said it expects the caps, which the industry lobbied against for months, to erase $2 billion in revenue annually.

"The economics of offering a debit card have changed with recent regulations," a spokeswoman for Bank of America said Thursday.

The only thing surprising about this news is that anyone Congress was so blind to reality that they expected anything different. Did they really believe that banks would just shrug when their revenues declined by billions of dollars? Since they can't get as much money from customers indirectly through debit interchange fees paid by retailers any longer, they're going the direct route and charging customers for using debit.

Congress, Not Banks, Are Gouging American Consumers

That WSJ article quotes one angry Bank of America customer, saying that she feels the bank is "gouging" her. That's not quite right: she paid this fee before -- she just didn't know it. It was incorporated into the prices of the goods and services that she purchased with her debit card. The fee was then paid to banks by the retailer where she shopped. Now Bank of America is just cutting out the middle man to collect a portion of the fees. This move isn't meant to create new revenue for the bank, but to replace the revenue that Congress forbid them to collect through their old fee policies.

In a perfect world, customers would end up paying the same amount in fees as they did before through this new approach. The only difference should be that they're paying more money directly and less indirectly. That means that the prices of the goods and services they purchase ought to decline accordingly.

Unfortunately, we don't live in a perfect world. As I pointed out on Wednesday, retailers aren't cutting prices. Instead, they're pocketing the $7 billion or so they'll save in fees. While this could theoretically change in the future, they have indicated that they aren't cutting prices at this time.

So customers will end up paying more than they did before once this new law goes into effect, but not because the banks are creating a "new" fee, but because the government forbid them to make full use of their old one. This financial regulation effort will amount to a gift to retailers, courtesy of Congress.

As I also pointed out, in particular, this action by Congress will hurt low- to middle-income Americans more than wealthier Americans. Banks find it very important to cultivate relationships with their wealthier customers, because they want their high deposits and to sell them other financial services. So banks' wealthiest customers will likely escape fees like this. Instead, less affluent Americans will end up paying more than their fair share.

The End of Debit?

But luckily, customers can avoid these fees -- they just have to stop using their debit cards. They will only be charged this fee if they use their debit card during the month, according to the WSJ story. I don't know about you, but this would push me not to use my debit card in any case other than emergencies. After all, I don't face a similar fee when I use my credit card. The bank also says that ATM use won't incur the fee -- so you could just use cash.

As a result of the new regulation, debit could fade away altogether. In fact, that's sort of the best-case scenario. If people continue to rely on debit as a means for payment, then they'll ultimately be paying more unless retailers respond by cutting prices accordingly. Rather than save Americans money, Congress' effort will have cost Americans instead.

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