Bank Fee Troubles Not Over

Published November 4, 2011

Bank of America, the nation’s largest financial institution by some measures, made headlines  for announcing it would charge $5 a month to consumers who used its previously free debit cards and then, last week, backing down on the new fees.

The bank itself, banking industry groups and many outside analysts attributed the fee directly to new federal regulations that place strict caps on the interchange fees banks charge to merchants who accept their credit cards.

This is largely true — the fee wouldn’t have been imposed absent the new regulatory price controls. But with 20/20 hindsight it’s also easy to see why BofA backed down.

That said, an end to the fee won’t necessarily be a victory for consumers or the economy as a whole, because somebody, somewhere will still have to pay the costs of Congress’ regulatory overreach.

Despite the enormous media coverage the new debit-card fee received when BofA announced it, and the nearly ubiquitous stories advising consumers on how to deal with (and avoid) fees, not many people were ever going to pay them.

BofA has only about 12% of the nation’s deposits and a slightly smaller share of all accounts. Only one other sizeable bank — Sun Trust (the 16th largest in the country) — fully followed BofA’s lead for all its customers, and both banks always exempted many higher-end consumers from the fees anyway.

Assuming the fees had stayed and nobody left either bank, only about 10% of Americans would have paid the fees. And even that wouldn’t have lasted forever. When consumers can switch easily between services — and a sufficiently organized person can switch banks in a few hours — it’s often difficult to make fees stick unless almost everyone in an industry charges them.

And from the day BofA announced the fees, that was never going to happen: At least three sizeable banks — ING, Citibank and USAA — explicitly stated they won’t impose debit card fees. (At least two of them, however, cut back other perks.)

So long as nobody goes broke providing “free” debit cards, no significant number of consumers is ever going to pay debit card fees. Consumers simply have too much power and choice in banking services for Bank of America’s fee-charging gambit to have worked.

But the reality of consumer power won’t make everything all right; it just means someone else will pay the cost of the new price controls. Since consumers resisted the fees, Bank of America’s management — which, quite rightly, gets rewarded based on the profits they produce for stockholders — is going to look for another group to pass the regulatory cost onto.

Not without reason, bank managers are going to try to avoid cutting their own salaries or reducing the returns offered to their stockholders. The regulatory burden will likely fall on whichever group can least resist.

The bank’s own rank-and-file employees and targeted groups of consumers — say, those with enormous credit-card debt or underwater mortgages — may end up paying instead. Consumers with debit cards may even end up paying the fees, in the form of lower interest rates on savings accounts or higher interest rates on loans.

Whatever happens, and even if nobody anywhere pays a debit-card fee ever, the new regulations are going to cost serious money. Someone will have to pay.

• Lehrer is vice president of Washington, D.C., operations for the Heartland Institute and national director of its Center on Finance, Insurance and Real Estate.