August 17, 2011
Large banks have cut free checking and debit card rewards programs to compensate for the coming loss of debit card interchange as a result of the Durbin Amendment. So far they’ve largely avoided adding debit card transaction charges, but if tests by Wells Fargo & Co. and JPMorgan Chase & Co. prove successful, consumers might soon be paying for the privilege of paying with debit.
Wells recently notified some checking-account customers in Georgia, Nevada, New Mexico, Oregon, and Washington that beginning Oct. 14 they will be charged $3 in each month that they use a debit card for purchases, a spokesperson for the San Francisco-based banking giant tells Digital Transactions News. No fee will be charged in months with no purchases.
The purpose of the fee, according to the spokesperson, is “to recoup lost revenue, over time.”
And that’s big revenue: Wells executives recently predicted the bank would lose about $250 million per quarter once the Durbin Amendment’s interchange price controls take effect. Wells is the nation’s No. 2 debit card issuer, with about 40 million cards outstanding.
The Federal Reserve Board in late June issued its final rule implementing the Durbin Amendment to 2010’s Dodd-Frank Act. The rule caps debit card interchange at 21 cents plus 0.05% of the sale for issuers with $10 billion or more in assets. The Fed is considering adding 1 cent to help issuers cover fraud-control expenses. In all, on a typical $38 debit card transaction, that will yield big banks a maximum of 24 cents, a 45% haircut from the current 44-cent average.
Chase, another mega debit card issuer, in February began testing a $3 monthly debit card purchase fee in a “very small market” in northern Wisconsin for customers with a basic checking account, a spokesperson says. If a customer doesn’t charge anything on a debit card in a given month, there is no fee.
The spokesperson says he doesn’t know what customer reaction has been to the test, or how long it will last. Chase has 27 million checking accounts nationwide but hasn’t disclosed its debit card count. The New York City-based banking company estimates the Durbin Amendment will cost it $900 million in annualized revenues.
The banks might have trouble making monthly debit card fees stick. In a survey last September, two months after President Obama signed Dodd-Frank into law, Pleasanton, Calif.-based Javelin Strategy & Research asked more than 3,000 consumers about debit card fees. Some 60% of respondents said any monthly fee would make them switch to other forms of payment such as cash, credit, or prepaid cards. Fifteen percent would tolerate a monthly fee of $2 or less and another 15% indicated they could accept a fee of $2 to $5. Six percent would accept a monthly fee of $5 to $10, and only 3% would pay $10 or more.
“Based on the research, it appears it’s going to be quite a problem,” Javelin director of payments research Beth Robertson says regarding her assessment of customer reaction to Wells’s new fee. She adds, however, that customers who refuse to pay the fee likely will switch to other payment forms rather than change banks.
Asked about Javelin’s findings, the Wells spokesperson says, “I think it’s too early to tell.”
The Wells and Chase experiments are especially notable given banks’ heavy promotion, and consumers’ embrace, of debit in recent years. Debit, in fact, is now America’s most popular electronic payment form, according to the Federal Reserve’s latest payments study. “Even though there’s a lot of consumer press covering the Durbin Amendment, I think it’s going to be a surprise [to customers] that debit is not being encouraged,” Robertson says.
In a report this month, Javelin reviewed the 10 largest banks’ reactions to Durbin by compiling news accounts and press releases. Six have already eliminated or are in the process of eliminating free checking, and another bank is tightening qualifications for the service. In related actions, several banks have rolled out new checking accounts with fees. One from Atlanta-based SunTrust Banks Inc. has a $7 monthly account fee and a $5 monthly fee for using a debit card. Another bank increased its overdraft fees and one cut reimbursements to customers for foreign ATM fees.
Banks also are cutting debit card rewards programs. Wells, for example, earlier stopped new enrollments in its program and is stopping new point accumulations for existing customers. Customers will still be able to redeem earned rewards, according to the spokesperson.
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