Brian Moynihan, the CEO of Bank of America is "incensed" that consumers and others keep beating up on his bank. Mr. Moynihan feels that he is only doing his job of maximizing shareholder profit. Customers also have the right to vote with their feet and leave BofA. The marketplace is always the final judge.
BofA, and other banks, claim they are justified to charge their customers five dollars a month to access their cash. The rationale is Congressional legislation capped and lowered what they charge merchants for pin-based debit card transactions to 21 cents per swipe so the difference has to come out of our pockets. Poor, poor banks! Let's look at the bigger picture in order to understand all profit centers available to banks when we use a credit or debit card.
We live in a world of electronic money transactions. The plastic we carry falls into two categories: credit cards and debt cards. They look alike but work very differently each time they are used. Each also carries different degrees of financial risk for banks. What's the difference? Well, a lot for starters. A look at history will clarify how the two cards work.
How many remember the good old days of using ATM cards? In the Washington, DC area where I live, the regional network was called MOST. As long as we were on the MOST network, there were no charges to take out cash or use the cards to buy items at local merchants.
These regional networks were so successful for customers and merchants that Visa and MasterCard lost market share. The two credit card giants retaliated by issuing debit cards co-branded with their logo. The new debit cards could be used like a MOST with a pin number or as a credit card with signature. Either way the money came right out of a customer's checking account. Debit cards limited consumer debt. Best of all, debit cards, unlike credit cards, when used with a pin number, virtually eliminated identity theft.
Now to the Merchant side of the story. When customers use credit cards to purchase goods and services, banks charge merchants between 2.25%-4% per swipe depending on the risk involved. That's a tremendous hit to the bottom line, particularly for small business owners. Debit cards carry different charges. If a debit card is used with a signature, like a credit card, banks charge a merchant between 1.15%-2% per swipe. When used as a pin-based debit card, the fee dropped down to roughly 35 cents per swipe. Congressional legislation lowered that charge to 21 cents.
Merchants have other incentives to see consumers use pin-based debit cards. Pin-based debit cards are not subject to charge backs since each sale is final. The chance of fraud is greatly reduced, eliminating penalties and charges generally associated with bad checks. Finally, pin-based debit cards reduce the chances of employees miscounting or stealing cash.
Sounds like a win-win situation for everyone? Particularly when one looks at what banks have to pay for replacement credit cards after a customer is a victim of identity theft.
But no, banks are not satisfied with the portfolio of charges they get from electronic transactions -- from 21 cents to 4% per swipe. Plus the interest on credit cards is outrageously high, even with on time payments and low balances. Also, those terminals merchants use to swipe our cards, banks charge very high rental fees whose contracts are expensive to terminate.
And now banks want to charge customers $60 a year to access their own money? Really, really? A merchant pays the bank about $5 for one $200 purchase when a credit card is used. For medium size merchants, it's thousands of dollars per month.
What can consumers do to fight back? We can always vote with our feet and take all our money to a bank or credit union that does not charge any fees. Credit cards can also be cancelled and consumers exclusively use pin-based debit cards for all transactions. Last, we can request an ATM card. Those old plastic cards are still around and may not carry any charges.
The bottom line is banks are imposing another tax on consumers. It's a complete lie for BofA, and other banks, to justify extra charges on debit cards because of the 21 cents cap. I have no problem with banks making money, but this is a sham that hurts consumers and the economy.