Bank hints at fee for debit cards

Back in the day, banks used to charge you a fee whenever you used a debit card. Eventually, that privilege became free. And today debit cards have outstripped credit cards as the most popular form of plastic.

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So wouldn't you know that banks are seriously considering charging a fee for debit card use again?

US Bank chief executive Richard Davis recently mentioned the possibility of some sort of debit card fee, The New York Times' Bucks blog reports. Davis also said that "debit is no longer a free product" and "there will no longer be rewards to speak of." (More on that below.) 

Why a fee? you might ask. Banks already charge merchants when you use your debit card in their stores. Besides, shouldn't you be able to access your own money for free? And using a debit card has got to cost banks less than handling a paper check you might otherwise write. (Yes, Virginia, some people still write checks.)

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A big reason is that the Federal Reserve in July plans to limit how much big banks (small banks are exempt) can charge those merchants for each debit card transaction. The Fed has proposed a 12-cent fee, a third or less of what banks charge now. (The financial reform law passed last year says the fee is supposed to reflect the banks' actual costs.  Banks are heavily lobbying the new Congress to overturn that provision.) The post continues after this video from last month, which explains the Fed's proposal in detail:

With that limit in place, banks will likely look to consumer debit card fees as an alternate revenue source. They also would love for you to switch back to using your credit card, where so-called swipe fees for merchants aren't being reduced. (Plus, if you don't pay off your balance each month, you'll pay interest.) A debit card fee would be incentive to use credit. 

Odysseus Papadimitriou, CEO of CardHub.com, also predicts that banks will push prepaid cards, but without all the burdensome fees many of them have now.

It's not yet widely known what form debit card fees will take. An annual fee is one possibility. Also, look for limits on how many times you can use your debit card each month.

About those debit card rewards: Chase will no longer enroll new customers in its debit card rewards program starting Feb. 8. It doesn't appear that those who haven't already signed up will be missing much. You have to spend $25,000 with your card to earn, say, a $50 gift card at Macy's, The Associated Press reports, or only $6,250 if you agree to pay a $25 annual fee for enhanced rewards.

We've already reported about the end of free checking at a number of major banks, as they look for different ways to make money. If they can't nickel-and-dime you one way, they'll find another.

At Bucks, "mobocracy" of Minneapolis explained his/her theory about why that occurs:

It's unfortunate that the fee genie got out of the bottle several years ago; banks, their overbonused executives and their shareholders got used to the fat profits they earned based on fees charged for services that were otherwise paid for through other banking revenues. … Bank revenue has been artificially inflated by bogus fees for so long that shareholder/executiv​e bonus pressure will cause them to institute two new fees for every one that might be constrained.

If your bank rolls out a fee for using your debit card, how will you respond? Will you switch to your credit card or will you use cash -- or look around for a smaller bank?

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