published Sunday, July 24th, 2011

Debit fees to pinch consumers

Pedestrians walk past a Synovus ATM off Market Street downtown. New legislation passed by Congress will cap what banks may charge retailers for debit transactions, leading banks to initiate service charges to debit card users.
Pedestrians walk past a Synovus ATM off Market Street downtown. New legislation passed by Congress will cap what banks may charge retailers for debit transactions, leading banks to initiate service charges to debit card users.
Photo by Dan Henry.

Banking may never be the same after Oct. 1, as a new federal rule threatens to eliminate free checking and affect the way people use their debit cards. 

The new rule slashes in half the amount banks are allowed to collect from merchants for each debit card swipe.

Lost revenue from swipe fees is expected to be made up with a bevy of new fees on card consumers, instead of merchants — who were granted relief by the Federal Reserve under the Dodd-Frank law, experts say.

“A lot of banks currently offer free checking accounts where there are no monthly fees, and that’s supplemented because of some of the interchange fees they’re able to receive for debit and credit card use,” said Jim Ingram, vice president at the Bank of LaFayette in Walker County, Ga. “When that’s taken away, they’ll have to go back to the service charges on some of the transaction accounts.”

Even small banks, which are technically exempt from new rules, will be forced to pass on higher fees charged to them by the financial institutions that run the debit network, according to officials.

Todd Wanner, chief financial officer at First Volunteer Bank in Chattanooga, said most banks are looking at monthly debit card charges ranging from $3 to $5, though some have experimented with much higher fees.

“We’ll go from making about $400,000 a year [1 percent of revenue] to losing about $800,000 per year,” Wanner said. “I’d have to charge customers about $3.25 [per month] to bring me back to break even.”

Regulators mandated a cap on merchant charges of 21 cents per swipe, less than half of what banks typically charge. Banks can charge a little more if they institute fraud protection, but it’s still a far cry from the average fee of 44 cents, or about 1 percent of each transaction, that banks charged merchants in the past.

Those fees paid for fraud protection, upkeep on the infrastructure and for new programs that allow consumers to use their card in more ways and in more places, said Trish Wexler, spokeswoman for the Electronics Payments Coalition.

“You have to remember, we’ve built up a multibillion-dollar infrastructure over 30 years,” said Timothy Amos, senior vice president and general counsel for the Tennessee Bankers Association. “About 25,000 financial institutions are connected on one end, and literally a million merchants or more on the other end, so it’s a huge infrastructure.”

Unintended Consequences

In addition to monthly account fees, regular customers could face higher ATM fees and limits on the size of debit transactions.

Under the debit card regime in place, banks, rather than merchants, are responsible for money lost to fraud. Bank officials say that swipe fees were an important way for them to pay for the expense of fraudulent transaction, so smaller transactions limit their vulnerability.

“It would make sense if they limit the size of each transaction,” said Frank Hughes, president and CEO of Cornerstone Community Bank. “That’s a sure way to limit fraud exposure.”

It’s part of the “unintended consequences” of financial reform legislation that was passed in the wake of the country’s 2008 financial meltdown, but at this point it’s like “closing the barn door after the animals are already gone,” said Larry Kuglar, president and CEO of Southcrest Financial Group, a holding company that owns banks in North Georgia.

“When the rulesmakers start applying their interpretation to what Congress intended, that’s when we get into a little bit of difficulty,” Kuglar said. 

In addition to the return of monthly fees, some banks are inventing new fees ranging from a $5 fee on declined purchases to a $3 fee for calling the bank to inquire about an account balance, according to news reports.

Help or Hindrance?

As customers shoulder more of the burden, some groups like the NAACP have spoken out against the effects the law will have on the poor and minorities.

In a letter addressed to U.S. House Speaker John Boehner, the civil rights organization expressed concern that customers seen as low-risk could receive better terms than those considered “risky.”

“So-called risky customers tend to reside in historically underserved communities, are already banking at the margins and are much more sensitive to increased costs,” wrote Hilary Shelton, director of the NAACP Washington bureau.

Higher fees could drive those customers away from banking altogether, unless they are prepared to jump through a few hoops.

In fact, banks have already laid out a roadmap for how customers can avoid checking account fees, which Wells Fargo started charging in 2010, said Jamie Dexter, a spokeswoman for the bank. 

New Fees

“You can use direct deposit, set up a savings account or maintain a minimum balance,” Dexter said, though the bank offers no guarantees it won’t change the rules after the regulations take effect.

Customers who set up automatic transfers to a savings account, maintain automatic mortgage payments, or keep more than $1,500 in their account can avoid a $5 monthly fee at Wells Fargo. However, they’ll still be on the hook for ATM balance inquiry fees, international transactions fees, overdraft fees and even excess activity fees.

Mike Butler, president and CEO of SunTrust Bank’s eastern Tennessee region, said the company added a $7 monthly maintenance fee in June “related to the ongoing transformation of our industry based on various factors,” which is eliminated if customers keep more than $500 in their account or use direct deposit. 

Clients can also avoid the fee “if they choose not to use their check card for debit transactions during a month,” he said.

The Cost of Fraud

Not everything is going to change at once, and many new charges have already been implemented. But depending on the revenue impact, banks may increase or decrease fees in the future, Hughes said.

Hughes said some smaller banks may adopt a “wait and see attitude” to see how the changes will affect their bottom line before they take further measures.

“I think you’re going to have a dormant period,” Hughes said. “You’re going to have a lull while banks wait to see what the impact on their income is going to be.”

But without the ability to adjust merchant fees upwards to pay for new services, all future costs for services such as cellphone payment will be charged directly to consumers, Wanner said.

If the network becomes unprofitable to maintain, work on some promising innovations may fall by the wayside, he said.

“I was getting excited about some of the technology coming down the pipe,” Wanner said. “Apple was working on an iPhone with a thumbprint that would reduce fraud, Visa was going to send us electronic copies of their receipts via email, but these are technologies that are now potentially on hold.”

Even as consumers pony up more of the cost, merchants continue to get the benefit, Wanner argued.

“Back in the day you used to walk in the restaurants and you saw all those bad checks hanging up on the wall, those represented real losses for them,” he said. “You don’t see that any more with debit cards, because we eat the cost of fraud now.”

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hcirehttae said...

Gee, do you think the rich are going to get richer...?

July 24, 2011 at 10:03 a.m.
memphisexile said...

Banking is not a right, it is a service that costs money sometimes. If a $5.00 monthly fee is going to break you financially, you need to evaluate how you are spending your money. You could also go to the bank and withdraw cash. ATMs are a service, if you can't afford them, don't use them. If you are on a fixed income you have a simple choice. Find a way to adjust your budget to cover the cost or don't. Move to another bank or stop using banks. No one owes you a free lunch because you are on a fixed income. Banking is a business, the banks do not owe you cheap or free services.

July 24, 2011 at 10:19 a.m.
su3y said...

you are right..banking is a business. and they make money by using my money & investing & spending it for themselves. i dont get interest for them using my money. so they get free usage of my money but i dont?

July 24, 2011 at 1:02 p.m.
memphisexile said...

Exactly. They get to use your money and charge you fees. You get the protection of having your money in a bank as opposed to a drawer in your house where it could be stolen. Some banks do pay interest on savings and checking accounts. I know mine does. But back to your point, they get to use your money, in exchange they agree to hold it for you in a secure manner so you don't have to worry about theft. If you do not consider that a fair deal, switch to a bank that will pay you interest, or don't use a bank. Banking is a service not a right, if you don't like the service don't use it.

July 24, 2011 at 2:02 p.m.

So, memphis exile, let me guess you work for a bank. The problem with your logic is that banks have no interest in their customers. It is all about the bottom line. Might I suggest we move to state banks, like the one in North Dakota. Cspan had a great program on yesterday discussing banks and jobs. It is during the q and a session. Here is a link.

http://www.c-spanvideo.org/program/300660-1

July 24, 2011 at 3:46 p.m.
memphisexile said...

I do not work for a bank, in fact I do not work in the financial sector and never have. Nor do I plan to. I am simply saying that banks do not owe anyone any kind of service. Having a bank account is not a right last time I checked. Wal-Mart does not owe me low prices on bananas and banks do not owe me free checking. Of course it is all about the bottom line, banks are there to make money not to help people. If your bank treats you wrong, move to a different bank that will treat you right. I do not know much about State banks, but I would assume they are like any other state run service; staffed by low paid indifferent workers with a record of poor service and mismanagement. Imagine going into the Bank and having it be like the DMV.

July 24, 2011 at 4:15 p.m.
Rickaroo said...

We tax payers saved the banks' butts by bailing them out and the banks continue to do nothing but put the screws to the consumer. The government is trying to help small businesses, which in turn would help the economy, by regulating the exorbitant fee for debit card transactions, and then what do the banks do but look elsewhere (their average joe/jane customer) to continue to fatten their already obscene profit margin. Memphisexile either works for a bank or is simply of the teabagger mentality that all business is good and all government is bad. He/she probably makes the same lame argument for health insurance companies and views health care as a privilege, not a right, resereved only for those who can afford their outrageously high premiums or are simply fortunate enough to still have a job at one of the few remaining companies that provide affordable group insurance for its employees. Certainly banking is a business and has a need and a right to make a profit, just as any other business does. But it would be good, in these hard times when the middle class has already sacrificed so much, for the big banks to share a little bit in the sacrificing too. Banks are sitting pretty right now and this minor regulation on business debit card transactions will not hurt them in the least. It will simply cause them to rake in a little bit less of an already obscenely high profit margin.

July 24, 2011 at 4:39 p.m.
Astropig said...

Practical how to tips:

1) Go to ING (ingdirect.com). Open a "paperless" checking account.The fees are almost nonexistent. You can access them through your account in tip #2

2) Go to a credit union. Lots of them now take anyone who asks.Open a checking account. Use that account to link to ING (tip one up there above). Their fee schedule should be a LOT less than a commercial bank. Stop being lazy sheep ! Close your account at the giant greedy banks. (I'll name names below) These mega banks feel that you owe them outsized profits as their due. If you are too lazy to switch, they own you.

3) Open an account at ALLY Bank. They will refund your ATM fees at the end of every month. They pay interest on checking and you can link to them through the Credit Union account that you opened after reading tip 2 above.

4) Take your money out of the bank on payday and pay bills with it (as much as is feasible). Pay cash and you will spend less.Pay cash and you will cut off the oxygen for these crroked,greedy bankers. It will feel good when you beat these jerks at their own game.They get NO cut of cash.

5) Close your account at the following:

Bank Of America - Biggest bailout corporate welfare queen.

Regions- Did you know that Regions just took away your right to sue them if they steal from you ? You would know if you read their latest disclosure that they posted on their website (but did not mail to customers) . You will be cheated in a kangaroo court arbitration where THEY pick the arbitrator.

Wells Fargo- Somebody has to pay for buying Wachovia. That someone is you if you're a customer of this bank. The money that they charge in fees could be used to make your retirement easier, not theirs.

First Tennessee- They hung out billions in bad loans and took dump trucks of your tax money. See how this works ? Now they think that life would be better if they raised their fees that you pay. Are you really that stupid ?

SunTrust- Another welfare queen took billions of dollars that you may have worked two jobs for ,but paid their CEO 7.7 million bucks in 2009.This was a 1.3 million dollar pay cut,by the way.

Don't just take it ! It's your money that they are stealing. Get mad ! Get even ! Join a credit union !

July 24, 2011 at 6:12 p.m.
rolando said...

Stop using your card as a debit card and use it as a credit card...no user-fees.

If you get a government check, you must have it sent to a bank...your choice of bank.

Paper checks cost banks money to handle...switch to online banking...no 50 cent postage, either. Pay all recurring bills online as soon as you get your money.

Use cash only.

July 24, 2011 at 6:48 p.m.
joepulitzer said...

Stop using your card as a debit card and use it as a credit card...no user-fees.

THAT LOOPHOLE WILL BE CLOSED, IF NOT ALREADY IN THE WORKS.

July 24, 2011 at 6:58 p.m.
eastridge8 said...

I agree...Banks are terrible to their customers...they're out to get as much of my money as they possibly can...I'm seriously thinking of going to Tn Valley Credit Union...unless someone knows something bad about them too!

I took a check that a BUSINESS gave me to THEIR bank...First Tennessee...and they charged ME $5.00 for cashing one of their customer's checks!!!

Of course, getting a MO from Walmart is cheaper than having a checking account at these banks.

July 24, 2011 at 7:17 p.m.
eastridge8 said...

Agreed joe...it's in the works as we speak...

July 24, 2011 at 7:18 p.m.
joecrash1 said...

The Nat'l Assoc for the Advancement of Communist Persons should complain to the very Demoncrats they backed to pass this idiotic piece of garbage legislation. Join a credit union and quit belly aching.

July 24, 2011 at 8:21 p.m.
inquiringmind said...

memphisexile, they use your money and mine to leverage a great multiple of the funds they actually have in dpeosits in order to generate large amouts of profit via loans. We never see the profit for use of our funds to leverage these large loans, at least not in a proportional way. Let me repeat, the banks carry a debt load that exceeds their cash on hand. Banks make money by loaning this money they leverage from our deposits and charging interest, any protection/safety we get for our money is a marginal afterthought and depends on public confidence in the banking system as the last bankig crisis showed. Banks could offer checking as a free service and still make their massive profits from the funds they borrow via the FED in the current system.

July 25, 2011 at 8:27 a.m.
ms1824706 said...

I cant stand it when people open their mouths a discuss things in which they know nothing about, it just makes you look ignorant!

September 14, 2011 at 11:36 a.m.
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