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BofA Debit Fees Offers Opportunity for Perfect Information to Drive Competition

Ever since Bank of America and other banks announced their monthly fees for using debit cards for purchases (BofA is leading the way on this with their $5 monthly fee), I’ve heard an elevated amount of conversation about it from friends and passersby. Most public policy doesn’t grab the person in the street, but charging five bucks to use your own money to buy something has hit a nerve. It’s not for nothing that BofA’s website went down today.

I’ve seen some conservative commentators view this as a vindication, saying it was the inevitable outgrowth of the restriction on bank swipe fees, and that as a result customers will have to pay more. This of course neglects the fact that customers were paying for swipe fees all along in the form of higher prices at retail stores. I don’t think this policy debate will filter down to people who simply think that greedy banks are trying to find another way to gouge their customers. But for what it’s worth, Kevin Drum is right. Conservatives may be afraid of the free market in this case, but it’s important to make the gouging transparent in order to make the market work.

The old fees were largely hidden. The new ones aren’t. Overdraft fees were deliberately designed to be unpredictable, unforeseen, and primarily aimed at low-income users. Swipe fees were invisible because the credit card industry is effectively a duopoly and prohibits merchants from adding swipe fees to credit card bills. After all, if they did that, consumers might actually see what they were really paying for the privilege of using credit and debit cards.

All along, banks have had the option of reforming overdraft fees to make them fairer and more transparent. They had the option of allowing merchants to charge customers for swipe fees or not as they preferred. But they didn’t. That’s because hidden fees, on average, are more lucrative. But hidden or not, we’re all still paying them.

The new fees are annoying, but that’s a feature, not a bug: they’re right up front in black and white, which means that consumers will see them and can be properly outraged (or not) by them. This in turn means that the free market has a chance to actually work: consumers will abandon Bank of America if their fees are too high and force them to charge less. Likewise, other banks will compete openly on the size of their fees. In the end, this competition will force fees down to the lowest possible profitable level, which is exactly what competition is supposed to.

Presumably, one bank will notice that the volume of better customer service outweighs the rent-seeking of taking money from customers for simple banking services. In fact, those banks are already here; they’re called your community bank. BankSimple is an online alternative that should ramp up later this year. “The banks” is a colorful shorthand, but there is at least some variance here, at least in simple banking. And hopefully some actual competition in that space will lead to lower prices and fees. That couldn’t happen in a world where swipe fees are collected from retailers behind the scenes and consumers didn’t know how much they were being screwed.

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David Dayen

David Dayen