As I was traveling to the Financial Blogger Conference a few weeks ago, all the news was talking about how Citi had announced that they would be charging more fees on debit cards. In fact, there have been quite a few banks that have announced an increase in fees over the last few weeks and months. There are very few that have free products like free checking or free savings anymore. All told, there’s a lot of anger aimed at the banks right now. But, is it all their fault? Or, are they getting a bad rap? Let’s examine where all of this fee increase stuff is coming from.
Durbin Amendment of the Dodd-Frank Wall Street Reform Bill
The Dodd-Frank bill did quite a bit, but the bit we want to look at is the Durbin amendment. The Durbin amendment was an amendment added with the intention of creating some competition in debit card processing fees. Specifically, it’s goal was to “To ensure that the fees that small businesses and other entities are charged for accepting debit cards are reasonable and proportional to the costs incurred, and to limit payment card networks from imposing anti-competitive restrictions on small businesses and other entities that accept payment cards.”
Which doesn’t really explain it all that much. I’ll try, but no guarantees that you’ll be any less confused. (NerdWallet does a really great job of explaining it, actually.) When a credit card/debit card is used as a payment, it gets swiped through a reader. The reader reads the data, and then sends the data along with the purchase data to a card processor. The card processor then routes the data and purchase data to the institution that holds the account the card is attached to. So, a Ally bank’s card and transaction would get routed to Ally bank. The institution accepts or declines the transaction and sends that back to the card processor. The card processor sends that on to the merchant. For it’s (necessary) work as the middleman, the card processor charges an interchange fee. Basically, a fee for all the routing it did. The Durbin amendment put a cap on how much that fee could be. The end result is that some of the larger card processors have to charge larger fees. Fees that are paid by the banks. The banks had two options. They could charge the merchant a larger fee to make up for it, or they could start charging fees to the user (that’s you) and cease many of the “free” programs that were previously supported by the profit margin they were making on the cards.
If they had passed all of the larger fees on to the merchant, many merchants would have likely stopped taking their cards. So, believing that the majority of users would lay down and take the extra fees and loss of “free” accounts, they passed the added fees on to the user. Again, that means you. What they didn’t count on was the size of the backlash they would get from the added fees. An educated user base, that has direct access to so many public outlets like social media, is making far more out of the situation than they ever thought would happen.
Does it really mean anything?
Here’s the funny part. (not really) There will be a small percentage of users who will move their business to Credit Unions and online banks who are absorbing the added costs and keeping their “free” accounts without adding any additional fees. But, the majority of users will pay the fee, complain about it, but, ultimately, do nothing. The new fees will become normal after a year or so, and things will continue on like they were before. Just with less “free” accounts and more fees.
You should be mad as hell!
But, not at the banks. They are merely doing what makes the most business sense to them and trying to maintain their profit margin. Credit Unions don’t work on a profit margin because they are not-for-profit businesses. Online banks have a higher profit margin due to not having any physical buildings and fewer staff. The people we should be mad at are our representatives in Washington. There’s a bill about to be introduced in the House of Representatives that aims to repeal the Durbin Amendment. If you feel strongly enough against the fees, you should send your state’s representatives (house and senate) a note (or make a call, email, whatever) and tell them you support the repealing of the Durbin Amendment.
Whatever you do, don’t just lay down and take the fees. Call, email, or write your representative. And, in the mean time, find a Bank or Credit Union that isn’t passing the added costs on to their users. Open an account at one of them and move your business. My personal favorites are ING Direct, Ally, and PerkStreet, but a local Credit Union would be great too.