The $5 Fee Heard 'Round the World

The failed $5 debit card fee is just the beginning.

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The $5 monthly fee that Bank of America planned to impose on debit card users has sparked a major backlash among consumers. The reaction was so strong that B of A reversed course, announcing that it would not levy the $5 fee after all. And this was not an isolated incident, as the likes of SunTrust, Wells Fargo, and Regions Financial Corp. also tested the waters on debit card fees.

Through all of this, what caught my attention the most were comments Senator Dick Durbin, and Illinois Democrat, made in response to the B of A $5 monthly fee. According to Market Watch, Durbin told consumers to “vote with your feet. Get the heck out of that bank. Find yourself a bank or credit union that won’t gouge you.” Putting aside whether a Senator should be telling consumers where to bank and whether a $5 monthly fee can accurately be called “gouging,” this is a clear case of “I told you so.”

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Recall that it was Senator Durbin that proposed the amendment to the Dodd-Frank bill capping fees big banks could charge retailers for debit card transactions. Apparently, Durbin felt that he and the Fed knew best when it came to setting prices. To put this in perspective, for you small business owners out there, imagine if Durbin told you what you could and could not charge for your products or services.

During debates over the Durbin Amendment, many predicted what should have been obvious. Big retailers wouldn’t pass on the savings to consumers, and big banks would seek to recoup the lost revenue from consumers. And that’s exactly what has happened. And the failed $5 debit card fee is just the beginning.

With interest rates at historic lows, banks can’t make much from the interest rate spread on demand deposits. Debit card transactions fees, thanks to the Durbin Amendment, have been cut in half. And fees are the only other source of revenue left.

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And that brings us back to Bank of America’s failed attempt at a $5 monthly debit card fee. Why did it fail? I believe it failed because it was an unavoidable fee, practically speaking. Most other checking account fees can be avoided. Monthly maintenance fees are often waived if a minimum balance is maintained. Overdraft fees can be avoided by not overdrawing an account. And ATM fees can be sidestepped by not using another bank’s ATM. But the debit card fee was nearly impossible to avoid, unless you simply didn’t use the card.

The end result is that the financially strapped end up paying for everybody else’s “free” checking. The fees generated by overdrafts total $16 billion, according to a Bloomberg article. While any of us can overdraw our account from time to time (I do and Citi charges me $10 each time), it stands to reason that most of these fees fall on folks living paycheck to paycheck. It’s easy to tell banks to lower these fees, but we can’t lose site of the fact that checking accounts aren’t free. It costs banks a lot of money to make these demand deposits available to consumers. So the cost has to be paid somewhere.

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One option would be for banks to charge a monthly fee to all consumers, eliminating all other fees. But as the $5 monthly debit card fee debacle makes clear, consumers would never stand for that. Debit card transaction fees were an ideal way to spread the cost of free checking to everybody, as it affected all transactions. But the Durbin Amendment wiped out much of those fees, to the delight of big retailers. So we are left with a system of “free” checking paid largely by folks who can least afford it.

In the end, there’s no such thing as a free lunch. Either banks will increase revenue or decrease costs. If they can’t increase revenue, consumers can expect to see features and services decline. Rewards checking accounts are already disappearing. And many believe that customer service at many financial institutions is at an all time low.

One of the winners from all of this is likely to be online banks. Because these virtual financial institutions don’t shoulder the cost of a network of branches, their reduced costs allow them to offer lower fees, debit card rewards, and even interest on checking accounts. Politics and protests aside, free online checking accounts may see their brightest days ahead.

DR is the founder of the popular personal finance blog, the Dough Roller, and author of 99 Painless Ways to Save Money.