News story after news story are reporting the same thing – a lot more of us are switching to credit unions and community banks. This spike in activity is being attributed in part to the scandal over announcements by the mega banks to impose new cardholder debit fees. In fact, November 5th (that’s this Saturday1) – has been organized as “Bank Transfer Day”, a movement encouraging big bank customers to close their accounts and make the switch.
For those following the Durbin Amendment’s debit card Interchange regulations, and the impact on small merchants like we are, we have to ask - what good does it do merchants to have consumers switch to financial institutions who were made exempt in the Durbin Amendment from the Fed's regulated debit rate? Bank Transfer Day effectively reduces the intended merchant benefit and stated purpose of the legislation.
Of course the beneficiaries of Bank Transfer Day are the credit unions and community banks, where, because they were made exempt from government regulations, high debit Interchange still exists, and free checking and other free services are alive and well.
Regulators charged with governing debit fees were asked to bring costs in line with the actual cost of processing a debit transaction but were not allowed to give consideration to what other services debit fees were subsidizing (like free checking).
One of the main tenants of debit reform was that consumers didn’t realize that card acceptance fees were invariably passed on to them in the form of higher prices at the register. Labeling card fees as “hidden”, the legislative arguments for government regulation of debit Interchange aimed to bring transparency2 to the cost of consumers using debit cards for their day to day spending.
The objective was to improve transparency by shifting the costs of debit use from the merchant back to consumer with the idea that consumers could more easily “shop” bank card issuers. Even before major banks, including JPMorgan Chase and Wells Fargo, announced that they are canceling new debit card fees just recently introduced and Bank of America dropped its planned $5 debit card fee, market research had already provided evidence of consumers’ likely reactions to new debit fees. Yet the banks started down that path anyway, only to quickly reverse course.
Regions sent me an email this week stating “You spoke, and we listened. Based on feedback we have received from our customers, Regions has eliminated the monthly $4 CheckCard fee as of November 1, 2011.” Yet, it is widely expected that regulated mega banks will find other, more creative, means of recovering lost revenue. This time however, it will resemble that old urban legend “Find the Hat” - the failed attempt at transparency will simply mean banks won't be as straight forward when finding ways to make up for their lost debit Interchange revenue.
1 Is your big bank and community bank open on Saturday?
2 It’s ironic that the federal government is giving lessons on transparency. For most of us, taxes are taken out of our paychecks and we are left with “take home pay” and on top of that we don’t realize that both the business tax burdens and tax compliance costs are hidden into the price of everything we buy. Politicians know that transparency would cause a tax revolt.