Personal Finance

Bank of America, Adam Smith and a Fee Market System

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This week, Senator Dick Durbin (D-Ill) made a remarkably pithy statement on the floor of the Senate that Bank of America patrons should “vote with your feet, get the heck out of that bank.”

By now, everyone who reads, watches and listens knows that Bank of America instituted a five dollar per month charge for usage of its debit cards effective early next year, and, of course, that’s what prompted Durbin’s remark. While there will be no fee if you have at least $5,000 in a Bank of America account, have a mortgage with the bank, are a B of A employee, or only use the debit card for ATM transactions, any one purchase in a given month will ding you the five bucks. This is in addition to all other fees on its “basic” accounts—of which there are many types—and which can already carry fees as high as $12 per month if minimum balances are not maintained. Not wanting to miss out on the fee-for-all, Citibank also announced a substantial rate increase, hiking the minimum balance requirement for certain checking accounts from $6,000 to $15,000, else a $20 a month fee will be charged. They also announced that “EZ Checking” account holders will be charged $15 a month if they don’t maintain a balance of at least $6,000.

[Related Articles: Many Consumers Outraged by Bank of America's Big New Debit Fee and Card Fees Surpass Interest Revenue, Will Get Worse Warns Analyst]

B of A and Citibank are not alone. A number of smaller banks have already announced the imposition of similar fees and many other banks have been testing them. Further, all of the big banks are considering all manner of fees, including debit card fees, to offset a number of revenue sources cut off by the passage of the Credit CARD Act, the Dodd-Frank Act and other consumer protection legislation.

But there’s been a fairly large stir directed at B of A because it was the first major U.S. bank to announce the debit card fee as a certainty, and to charge the highest number that’s ever been talked about for such fees. I guess “fairly large” is an understatement. Last week, a Fox Business News anchor cut up her debit card on camera. Yesterday, a 22-year-old customer delivered a petition with 153,000 signatures protesting the fee to a branch in Washington, D.C., just before she closed her accounts, cut up her debit and credit cards on the sidewalk and left with $400 in cash she said she was going to deposit in a credit union. Rep. Brad Miller (D-NC) has just introduced a bill to facilitate consumers closing accounts and moving their money to other financial institutions. (The Move Your Money project offers a comprehensive list of local financial institutions.)

Furthermore, Bank of America is the only large U.S. bank that still has “problems.” It’s effectively been bailed out twice in the past few years. First, as part of the 2008 bank bailout where it was one of the largest recipients of taxpayer largesse; and then just a few weeks ago, when Warren Buffett—the world’s most popular (and populist) octogenarian billionaire—invested $5 billion in the bank. He said recently in an interview that the bank’s problems persist and will take quite a while to solve—certainly a number of years rather than months. Those problems, which are derived from the mortgage meltdown and the real estate crash, have caused the bank’s stock to drop about 50% from its 2010 levels.

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In keeping with the new Durbin-inspired trend of candor and brevity, B of A CEO Brian Moynihan justified the new fee by saying, “we have the right to make a profit.” (Translation—I think they need the dough).

B of A and the other big banks may well lose billions of dollars in revenue as a result of populist rage against institutional greed and corruption—as manifested by certain provisions of the abovementioned pieces of legislation that aimed to achieve greater accountability, certainty, transparency and fairness in the financial services sector. This includes the Durbin amendment—which, according to its author, was aimed at curbing the banks “excessive” profits relating to swipe fees. No doubt the number crunchers at B of A determined that instituting the fee will make them more money than they might lose from disgruntled customers who follow Durbin’s advice and “get the heck out of that bank.”

According to Bob Hammer, CEO of R. K. Hammer, a card industry advisory firm, B of A’s new debit card fee will generate an estimated $1 billion, “About half of what Durbin will cost them.”

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Bank of America, Adam Smith and a Fee Market System (cont.) »

Image: Kendrick Arnett, via Flickr.com

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  • Tony Vittal

    You assert that, in a free society, the authority of any government should end with assuring that consumers are well informed, that disclosure of fees and risks is robust, and that unfair or deceptive practices are banned. That’s not enough to level the playing field when consolidation in the financial services industry has resulted in fewer options and no real market power for consumers and monopoly-like power in the hands of many money-center banks.

    As former director of the New Jersey Division of Consumer Affairs, you were quick to protect consumers against corporate misconduct. Is the bank fee debacle really any different from the misconduct you moved against in New Jersey? Let’s have a reality check. Federal legislation capped the amount banks could charge merchants for a debit card transaction (any such charge being a gouge, since a debit card transaction is no different in substance than payment with a check, except for the speed at which the funds transfer). Banks are making up the Congressionally-mandated difference by increasing the fees they charge debit card holders — in other words, just changing the identity of the persons getting gouged. Since most banks view their customers as captives, they feel free to ratchet up the extent of the gouge by, among other things, increasing the minimum deposit levels for a “free” checking account. Thus, the banks’ double-dip (interest it earns by putting your deposits to work, plus the fee it charges you for the privilege of earning money with your money) expands to cover a greater number of accounts.

    The downside to the capitalist solution proposed by Sen. Durbin — voting with your feet — is that removal of the deposits used by the banks to earn the interest and fee income that keeps them afloat once again will bring the “too big to fail” problem to the forefront of our consciousness. All of us — bankers and the consumers of banking services — need to remember that we are mutually interdependent. That means that the only ways to keep matters in balance is for the banks and their customers to act responsibly, failing which additional regulation must be brought to bear.

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