On the face of it, banks and consumers have a mutual love of debit cards: Marketing reports show usage is steadily climbing and predicted to continue upward, while banks are happy to take in fees associated with those cards.
Local banks and banking analysts say debit fees are one of the few areas that are reliably bringing income as ATM and other fees are on the wane. But it’s impossible to miss the growing discontent from those who are forking over the cash.
New bills in the Massachusetts Legislature propose to diminish overage fees that some banks could charge, and Congress is tackling the issue of merchant fees as well as consumer overage charges. And as giants such as Bank of America and Chase offer to lower or eliminate fees, their smaller competitors might have to change up their games.
“Fees have a natural life cycle,” said Jim Jones of consultancy First Wellesley. Debit cards are busily bringing in cash for banks, but as with all fees, they’re going to diminish someday – that’s when banks have to find a new income stream to exploit.
“It’s always a game of replacement,” he said, but added, “Right now, for banks, the [merchant] fee for debit cards is working well.”
Growing Opportunities
Kim Meader, executive vice president of business lines at Salem Five Bank, said customers there have increased debit usage by 50 percent from January 2007 to January 2009, and rose another 23 percent in the first four months of this year. Customer numbers have been going up over the past few years, but ATM usage hasn’t risen and check processing has decreased, which means lower fees from other such banking activities.
“[Debit card usage is] one of the few areas of banking where the opportunities to generate income are growing,” he said.
The best way to keep that fee momentum is to bring in more customers and get them to use debit cards often, Meader said – Salem Five has been offering a rewards program that offers cash back, he said, while other banks set up programs that allow users to accumulate points toward other types of rewards or donations to favorite causes.
Meader said he wasn’t expecting a major change in debit fee income as a result of new legislation, but acknowledged that if such anti-fee laws did go through, it would change the game significantly for banks – and unfairly so.
Banks are justified in levying such fees on consumers, he said, because in effect the institution is extending an interest-free loan for customers who overcharge on their account. Make a $100 purchase when you only have $50 in your account, and the bank steps up with a loan for that $50, interest-free, he said.
Meanwhile, consumer advocates have been railing against banks in the media over the past few weeks, noting that customers’ increasing use of debit cards for small purchases often leads to $35 fees for going over their limit by as little as a few dollars.
Additional fees for debit cards can come from a variety of sources. Some charge customers a few cents every time they use their pin numbers to make a purchase while others don’t; payment networks pay a small percentage of each purchase to the bank.
Still, available data indicates debit card usage is on the rise. Marketing researcher Mintel reported in a May survey that 43 percent of respondents were using debit cards more frequently and credit cards less because of the recession. The California-based Nilson report predicts debit cards will be used in 60.2 percent of card transactions next year, up from 58.2 percent in 2009.
John Carusone of the Connecticut-based Bank Analysis Center, said debit fees are indeed playing a bigger role in the mix of bank income, and that change in competitors’ strategies or new regulation might send banks back to brainstorming new ways to come up with income.
But, “until it’s codified by regulation, banks will try to get away with as much as they possibly can,” he said.
