As the majority of consumers have already heard, a significant amount of banks in the United States have decided to add a fee when a consumer purchases a product or service using a debit card. Other than an increase in consumer outrage, few have taken the time to analyze the repercussions of such a fee on debit card use. This article will examine what the effects on consumers will be and what their options are moving forward to avoid debit card fees all together.
The fees are a result of the diminished profit of banks from the Durbin Amendment which forces a cap on processing debit cards. The hit on the consumer’s wallet will be anywhere from $3 to $5, depending on the bank, charged monthly. Some banks, including Wells Fargo and JP Morgan Chase have already rolled out pilot programs in select US states. Other banks, like Bank of America, will roll out the debit card fees across the country starting in 2012.
The real issue for consumers is all the “other” news that comes with the debit card fee announcement. For example, consumers who maintain a large sum of money in their savings/checking account, or in other words, are more affluent, will be exempt from the fees entirely. This means that families who can’t afford to save money will be penalized and forced to pay the fees. Furthermore, during the time when Senator Durbin was trying to control the fees associated to debit card processing, the actual fees for swiping a debit card went public. Consumers found out that the actual cost is only a few cents per transaction. This makes the proposed debit card fees of $3 to $5 even harder to accept.
An Increase in Credit Card Use
A recent consumer spending survey has shown that debit cards are the most popular method of payment other than cash. The reason for this popularity is the low costs for the consumer traditionally associated with using a debit card. From an economic standpoint, debit cards are elastic and consumers respond negatively to price changes. The higher the price of using a debit card, the less people will use. However, now that the banks have decided to add a debit card fee, the likelihood that debit card use will grow among consumers is slim.
This is where the increase in credit card usage will come from. Since there are no associated fees for the consumer when using a credit card, it is an alternative sure to increase in popularity if these debit card fees are implemented for the long term.
The study explains that credit cards are the primary substitute for debit cards because consumers who use cash are unlikely to change their payment method regardless of the options presented to them on the market. This involves young children and older adults. Consumers who use debit cards rarely use cash and are more likely to substitute their spending with another card option.
A Shift to Small Banks, Online Banks and Credit Unions
It is no surprise that the implementation of debit card fees has upset the general public. However, with all the outrage, what options do consumers truly have to get back at banks?
One of the options is switching to a credit union which offers similar services to a bank but at lower rates. Credit unions are also owned by its customers and therefore, do not need to report to shareholders like banks do; they are not profit driven. Furthermore, credit unions are non-for-profit organizations that return any profits back to its customers with lower rates.
Consumers also have the option of banking with an online bank like ING Direct. Online banks provide consumers with lower rates and no minimum account balance requirements but have very few physical locations. Since online banks keep operational costs low, savings account interest rates are typically higher when compared to large banks. Online banks also boast 24/7 customer support to all their clients regardless of their time zone or geographical location.
A third avenue consumers can take to avoid debit card fees is switching to a local, community bank. These banks typically offer lower rates on credit cards and loans and are more involved in the community they serve. If you are a consumer that prefers credit/debit cards compared to cash, a community bank would be a great option.
The only obvious issue that arises with community banks is the accessibility. Most of these banks focus on counties or states but have little coverage outside their territory. If a community bank consumer travels a lot, they will end up paying ATM banking fees at other banks to access their savings.
Looking Ahead with Debit Card Fees
It is not clear what will happen with the large banks adding debit card transaction fees. The entire initiative is only a few months old and is currently only being tested in specific markets. The final decision on the side of the banks has yet to be made. With the backlash from the general public, primarily the middle and lower class population of the United States, it would be difficult for banks to allow these fees to continue. However, with banks claiming that the Durbin Amendment will cost them $250 million per quarter, they may be looking to call the consumer bluff and see if the fees are enough to make consumers jump ship and change banks. Whatever the outcome may be, consumers have options at their disposal and should take advantage of them.
Michael Smigs is a social media consultant for the financial industry, specializing in debit card processing, credit card processing and e-commerce solutions. To get in touch with Michael, he can be contact at MichealSmigs [at] gmail [dot] com.