Bank of America's $5 Debit Fee Shows the Danger of Transparency

The bank might regret not creating new hidden fees instead

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About a month ago, Bank of America angered many of its customers by announcing that it intended to begin charging a $5 monthly fee to some customers who uses debit card. The fee would be created to fill a $2 billion a hole left by 2010's Dodd-Frank financial regulation bill. One provision would cut its revenue from debit card interchange fees (paid by merchants). Yet a new report indicates that banks might be rethinking debit fees, due to the public's severe adverse reaction to learning of these plans. As much as consumers might hate additional fees, it's hard to fault this one as more of the banks usual tricks: this one couldn't have been much more transparent.

The Fallout

When customers learned about Bank of America's new proposed fee, the reaction was swift. At that time I wrote an article explaining the bank's motives. It turned out to be one of the month's most popular on the site, ultimately amassing over 700 comments -- and most of them angry. For example, commenter "Paulp" complained about the fee:

Banks don't accept billions of dollars of PROFIT (that's after huge salaries, bonuses, and parties) as enough. Congress passed laws to prevent them from ripping off customers with esoteric policies, so instead they just come out and charge a fee.

His sentiment was echoed by other commentors -- and no doubt consumers across the nation. So now Bank of America and others are considering revising this policy. Over the weekend, Nelson D. Schwartz at the New York Times reported:

The hesitation at Bank of America comes as other banks are also pulling back, at least for now. Wells Fargo said Friday that it was canceling a test that would have imposed a $3-a-month charge on debit card holders in Georgia, Nevada, New Mexico, Washington and Oregon. JPMorgan Chase, which was testing a $3-a-month charge, has decided it will not impose a stand-alone debit card use fee, a person briefed on the situation said.

So maybe banks really do listen to their customers. Will they escape new fees after all? That isn't likely. These banks still have the same costs of business to pay for and shareholders to pacify. Anyone who think that banks will just shrug as Congress attempts to cut their revenues by billions of dollars is rather naïve.

The Problem With Transparency

On some level, the situation here is almost ironic. For the past few years, Congress had chastised banks for having too many hidden fees. For example, politicians complained that overdraft fees were unfair, so they made new laws limiting them. In the case of interchange, they said that the fees hid the real cost of a debit card transaction, so Congress cut them.

Bank of America and others intended to respond to this change with a very transparent new fee: a direct fee on customers who use debit. Shouldn't this cause Washington to applause? Not so much. The author of the debit card interchange fee regulation, Sen. Dick Durbin (D-IL) criticized Bank of America, calling the new fee "outrageous." But isn't this exactly what he wanted?

Remember, Bank of America could have acted differently. It could have tried to skirt new regulations by putting in place new, creative, sneaky fees that customers didn't realize they were paying. Perhaps they could institute a "card issuance fee" of $25 every time they sent you a new debit card. Certainly, there are lots of ways to make fees that are not particularly transparent.

But Bank of America didn't take that route. It effectively said, "Okay, we are losing revenue from interchange. So to make that up, let's be super-transparent and tell our customers that they'll have to pay a small monthly fee for using their debit cards." And then their customers flipped out. So much for clarity!

But Banks Will Get Their Money

This is an unfortunate story, because Bank of America and others are being condemned for finally providing the very transparency its critics called for. In a radio interview, I called the fee "surprisingly straightforward." In the past, you just didn't use to see banks respond to regulation in such a direct manner.

That could be in large part because they suspected that customers would get annoyed if they learned that new fees were coming. Clearly, they were correct. So a rational reaction would be to hide these fees instead -- at least then only some customers will get angry when they get hit with the fees, and the impact will be delayed and spread out over time. When a bank instead announces a new fee that lots of its customers are subject to, it gets a sharp, widespread negative reaction. No wonder so many fees are opaque.

We'll have to wait to see how banks end up making this money if not through a new debit fee as initially planned. But make no mistake: they will find a way to make up this money. They need to lure top bankers and management at salaries the market dictates. They need to continue to pay employees at thousands of retail branches. They need to spend billions of dollars on technology. They need to turn a profit that meets investor expectations. When Congress shakes its finger at banks and writes new rules, their costs don't simply disappear. The real shame is that future fees might end up being less transparent. Because let's face it: no consumer has ever met a fee he or she liked.

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