In defense of Bank of America's fees

After its debit-card fee misstep last year, the bank has regrouped with a more thought-out approach to raising fee revenue.

By TheStreet Staff Mar 1, 2012 12:14PM

the streetBy Philip van Doorn


Let's put on our thinking caps before the inevitable and tiresome outcry against Bank of America's (BAC) coming deposit service and fee changes.


The Wall Street Journal on Thursday reported that Bank of America was "working on sweeping changes that would require many users of basic checking accounts to pay a monthly fee unless they agree to bank online, buy more products or maintain certain balances."


A Bank of America spokesperson says that "there is nothing new in the Wall Street Journal article," since the company had previously disclosed the "new solutions we are testing in Massachusetts, Arizona and Georgia, and all of them offer ways to avoid monthly maintenance fees. If customers do their basic banking online or via ATM, there are no fees."


The spokesperson confirms that a customer who only has a checking account with Bank of America can avoid all service fees by switching over to electronic banking, which includes free electronic bill paying.


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Bank of America's plan last year to institute a $5 monthly fee for the privilege of using a debit card was not well thought out, and after a predictable outcry, the company backed off.


This time it's different, and the company has no choice. The recent political and regulatory curbs on deposit account service charges began on Aug. 15, 2010, when the Federal Reserve implemented new rules requiring banks only to provide expensive ATM and debit card overdraft protection for customers who previously signed up for the service.


The first full quarter of operations under the new rule was the fourth quarter of 2010, when Bank of America's service charges on deposits accounts dropped 36% from a year earlier, to $1.3 billion, according to HighlineFI.


When the "opt-in" rule went into effect, Bank of America eliminated all point-of-sale overdraft protection for debit card purchases, which a company spokesperson says "has significantly limited customers' ability to unknowingly overdraw their accounts and eliminates unexpected overdraft fees on these transactions."


For ATM transactions that could cause an overdraft, Bank of America says "we alert customers in advance that a transaction might cause an overdraft and result in a fee, and the customer can choose whether or not to proceed with the transaction."


The company in November settled a class action suit over maximizing overdrafts by processing the largest transactions first on a daily basis, by agreeing to pay $410 million to 13.2 million customers whose debit card overdraft fees had been maximized, when the bank processed larger transactions first.


The latest megahit on fee revenue was the Federal Reserve's clampdown on the interchange fees large banks charge merchants to process debit card purchases, as required by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act.


The Durbin Rule reduced Bank of America's fourth-quarter revenue by $400 million.


Here's how the "opt-in" and Durbin rules affected the rest of the "big four" U.S. bank holding companies:

  • JPMorgan Chase's (JPM) service charges during the fourth quarter of 2010 -- the first full quarter under the requirement that customers sign up for ATM and debit card overdraft protection in advance -- totaled $1.1 billion, declining 18% from a year earlier. The company said in its annual 10-K filing on Tuesday that "as a result of the Durbin Amendment, its annualized net income may be reduced by approximately $600 million per year."

  • For Wells Fargo (WFC), fourth-quarter 2010 service charges on deposit accounts totaled $1.0 billion, declining 27% from a year earlier. The company said during the fourth quarter of 2011, it saw a "$365 million decline in debit interchange fees."

  • For Citigroup (C), which has a much smaller U.S. deposit base than the other "big four" club members, fourth-quarter 2010 service charges on deposit accounts actually increased 1% year-over-year, to $158 million. The company said during the fourth quarter of 2011, main subsidiary Citicorp saw a slight year-over-year increase in retail banking revenue, to $4.1 billion.

The next attack on banks' service charge revenue is likely just around the corner, with the new and very powerful Consumer Financial Protection Bureau announcing on Feb. 21 that it had "launched an inquiry into checking account overdraft programs to determine how these practices are impacting consumers," with Director Richard Cordray saying that "overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it."


With the "opt-in" rule already in place, and with most people able to count, it would seem the CFPB might be overreaching here to protect people from themselves, but it doesn't matter. The bureau exists, and it has the power to hammer through more changes and more revenue reductions for banks.


The benefits of electronic banking. Switching over to electronic banking is a winning proposition for all parties:

  • With electronic banking, it is very easy to keep track of your records. In this day and age, a three-ring binder of bank statements seems a little dated, and it takes up a lot of room, and Murphy's Law indicates that the key statement you need will be missing.

  • With electronic bill paying, you save on postage, you avoid manually writing checks, filling out a check register, etc., and avoid check-printing fees. It's also easy to pull up records to prove payments have been made.

  • You avoid a monthly service charge.

  • The bank's costs are reduced, since they no longer have to buy paper and envelopes, print and send expensive monthly statements.

When interviewed last week for our coverage of the CFPB investigation on overdraft fees, FBR analyst Paul Miller said "it costs between $100 and $120 a year to maintain a checking account for your customer," and that if the new regulatory paradigm meant banks were losing money on checking accounts, they would institute fee changes to "either push you out the door, or find a way to charge you."


It appears that Bank of America is following a well-thought-out plan this time to address a long-term revenue and expense problem.


The self-styled "consumer activists" will be clamoring, once again, for you to switch over to a credit union. Fine. But keep in mind, you will be giving up free access to a national network of 17,750 ATMs.


Mar 1, 2012 9:29PM
So let me see if I understand. BoA introduced Debit cards because they cost less to process than a paper check. Then they found that they could charge businesses every time their customers used one of their debit cards instead of a check, so it was a win-win situation for them.
But their fellow bankers, who run the Fed, told them that it is not fair to charge the merchants for taking payment by debit card. So BoA try to charge customers for a debit card.

Then, when it occurs to BoA that this might  cause customers to write paper checks again, which would cost them money instead of making a profit, they cancel that bad idea. Now they have a better idea - they will let customers keep free banking provided that they promise to use only debit card or other electronic payments,and not paper checks!

Since debit cards save the issuing bank money, why should merchants have to pay for accepting them?

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