Bank of America is the latest large bank that has announced new fees for debit card usage. According to the Wall Street Journal, Bank of America "disclosed the plan on Thursday in a memo to its senior staff." According to the memo, there will be a monthly fee of $5 if the customer makes debit card purchases during the month. ATM transactions won't count. This will be on top of any standard monthly service fee that may apply to the checking account. According to this AP article, the fee will be rolled out in stages starting with select states in early 2012.
As I reported in August, several large banks have announced new debit card usage fees. Wells Fargo and Chase are testing a $3 monthly fee in some states. SunTrust has added a $5 monthly fee on its Everyday Checking and Student Checking accounts, and Regions Bank has added a $4 monthly fee on some checking accounts. In all of these cases, the banks are only charging the extra monthly fee if the customer makes debit card purchases during the month.
Banks are blaming the new debit card interchange fee regulation that takes effect tomorrow, October 1st. This will cap the fees to 21 cents with an extra 0.05% of transaction price to cover fraud prevention costs. The Fed raised the caps in their final rules that were released in June to ensure all costs were taken into account. They do not include the costs of reward programs. So when large banks like USAA Bank announced the end of their debit card reward programs, that made sense. But there's a big difference between ending debit card reward programs and adding new monthly fees.
Effects on Small Banks, Credit Unions & Reward Checking?
Bank of America is the largest bank in the nation based on total assets, so the concern is that this new debit card fee will become the norm for all banks. However, it's important to note that banks and credit unions with under $10 billion in assets are exempt from fee caps in this new debit card regulation.
There are only three credit unions with assets over $10 billion (Navy FCU, State Employees' CU and Pentagon FCU). So the vast majority of credit unions are exempt from the cap.
The vast majority of banks offering high-interest reward checking accounts are under $10 billion in assets.
Before the debit card fee regulation was finalized, small banks and credit unions were lobbying to have the regulation delayed. There were concerns that small banks would still see lower debit card interchange fee revenue even with the small bank exemption.
With the regulation taking effect tomorrow, there are still uncertainties about the long-term effect on interchange revenue at small banks. I recently received some insights on this from one of my reward checking industry contacts. I was told there are still concerns at the small banks in how companies like Visa and MasterCard will implement the cap. Will small banks really be free of these caps? Also, will the retailers refuse to accept debit cards from small banks that don't have fee caps?
One small bright spot for the small banks is that the final regulation did not include rules on network exclusivity. These rules would have given retailers more choice as to which network they would run the debit card transactions on. Small banks feared this would drive down interchange revenue.
Avoiding Debit Card Fees
One easy way to avoid debit card fees is to switch to credit cards. The new regulation only affects debit cards. It does not affect credit cards. Bank of America still allows customers to use its credit cards without monthly or annual fees. In addition, they still offer cash back rewards. For example, BankAmericard Cash Rewards Visa Signature Card offers 1% cash back on every purchase, 2% on groceries and 3% on gas. Another benefit of credit cards is that they are inherently safer to use. If there's a fraudulent charge, money doesn't immediately leave your checking account. The only issue with the credit card is that you need to ensure you pay off your balance each month so you don't build up debt. For those who can't do this, I suggest you review this money-management program.
For most of the readers of this blog, the only reason to use a debit card is to qualify for high interest in reward checking accounts. As I mentioned above, the vast majority of banks and credit unions offering reward checking accounts are exempt from the cap. If the regulation proves to be costly to small banks, we may see lower reward checking rates and banks ending their programs. For the time being, reward checking continues to be a good alternative to internet savings accounts. We still list 100's of reward checking accounts paying at least 2.00% APY on balances up to $25K. In addition, the vast majority of reward checking accounts are free checking accounts with no monthly service fees even if you don't meet the monthly debit card usage requirements. For those who just want a free checking account with no charge on debit card usage, reward checking is still a good choice. Please refer to my reward checking account overview post to learn more about high-interest reward checking accounts.
Another option is an internet bank like Ally Bank, ING Direct, Incredible Bank and USAA Bank. They offer free checking accounts with no extra fees for debit card usage.