Friday, September 30, 2011

BoA Debit Card Fees

Bank of America claims to be instituting a $5 a month Debit Card fee in January.  What is behind this, and should we care, as consumers?

The recent news headlines are blaring about Debit card fees to be imposed by BoA in January.  I have been a big fan of Bank of America as, from a consumer point of view, they can be a very useful bank to have.

Since they are large, they are everywhere.  So if you travel around the country, you can access your money and do business in nearly every State.  So it is convenient.

And so long as you don't do povery-think tricks like bouncing checks and creating overdrafts, or using 3rd party ATMs to take out $10 to buy ciggies and gas, they are a good bank in that they don't charge a lot of fees.  People who "hate" BoA are often stupid people to bounce checks and get into trouble and then whine when they discover that banks charge bounce fees.  But all banks do this - and singling out BoA for abuse only serves to highlight the stupidity of the consumer, not the bank.

As I noted before, if you put $25 a month into your savings account, your checking account is free.  Not bad.  In the last few years I have banked with them, I have yet to pay a single banking fee - even for paying bills electronically, which often costs them 44 cents in postage.

But all of that is about to change, it seems.  And $5 a month to use a debit card is $5 too much for me.

Why are they doing this?  Banks previously got 44 cents from retailers for every debit card transaction.  for some reason, this is being reduced to 22 cents, a 50% reduction in their cash-flow.  If you run your debit card as a credit, however, the bank gets a hefty percentage of the purchase price - usually 2% or more.  So debit cards can be very profitable - if run as a credit, not a debit.

And for this reason, many banks offer frequent flier miles or other "kickback schemes" on debit cards, to encourage users to run them as credit cards, not as debit cards, as the bank makes more money this way.

But regardless of the backstory, what is important to the consumer is the overall effect to their bottom line.  And if we have to pay fees for using a debit card, this is a very slippery slope to be traveling down, as it will open the gateway for more fees down the road.

At this juncture, the consumer has three options:
1.  Write checks.  Checks are still free, for the most part, at BoA, although you do have to pay to have checks printed.

2.  Use a credit card and then immediately pay it off using BoA online bill payment or "pay my bill" on your credit card website.  This is fine, but runs the risk of you developing a credit card debt over time.

3.  Use your Debit card only as an ATM card, and take out and pay cash.  If the card is not used as a debit card (run as debit or credit, it doesn't matter) no charge is made.  But once you make even one purchase a month, the $5 fee kicks in.

4.  Switch to another bank which does not have this fee structure.

For me, I think the answer is #4, unfortunately.  I have been a big fan of BoA, but perhaps our relationship is finally drawing to a close.  They have a great online website and a great network of ATMs.  But I am not going to stick around and see my wealth dissipated in more and more bank fees.

Perhaps BoA needs to instead look at its bloated cost structure - excessive branches and offices with redundant tellers - and think about CitiBank's model instead - using teller-less ATMs for most transactions, and cutting the number of branches.

Regardless of the reasons behind the BoA move, you have to analyze this from a consumer standpoint.  And monthly fees make no sense at all, so long as other banks offer free checking and free debit cards.

This move is doubly disappointing for me, in that I had hoped BoA would turn around in the next year.  I had bought BoA stock, thinking that, with such a great infrastructure, they could overcome their Countrywide Mortgage debacle and eventually emerge as a key player in the banking industry.

However, this fee model might just drive away a lot of customers in their customer base.   I am not sure how it will allow them to succeed in the long run.

* * *

UPDATE:  January 23, 2014.   Bank of America backed down on its proposed debit card fee, after customers made quite a fuss about it (quite clearly, they read my blog, right?).   However, in 2012, they changed the basic checking account, so that if you want to use a teller for deposits and withdrawals, there is a monthly fee.

However, BoA decided to offer an "eBanking" account, which is fee-free.   How does this work?  Well, it is like the Citibank model - you do all of your transactions online or at the ATM (the BoA check and cash deposit feature is very well done!) and foreswear using the teller.   Since I had not seen the inside of a BoA bank in over two years, I agreed to this.

This tells you where banking is going in the next 10 years - automation.   Traditional banks, with their tellers and drive-up windows are going away - to be replaced by highly sophisticated ATMs.   Yes, there will still be bank offices, but far fewer of them.

And if you think about this, it makes sense - banking is prime to automation, as most of the tasks involved are data entry and processing of data.   There really is nothing a live human being adds to the picture, except the opportunity for data entry errors.

This next wave of automation will, of course, put a whole new class of people out of work - bank tellers and employees - even the janitors.

Want a job with growth potential and stability?  Become an ATM repair and maintenance technician.   I'll bet those will be in short supply!   Sadly, median salary at the present time is only $34,252 a year.   But that's more than a bank teller makes!

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