(BAC) Bank of America to Charge for Debit Card Usage

Following the footsteps of some of its peers, Bank of America Corporation (BAC) is all set to charge its debit card users, in order to recoup some of the revenue losses that the company would suffer after the debit interchange fee (proposed by the Durbin Amendment) takes effect from October 1. BofA has announced that it would charge customers $5 a month for using the debit card from early next year in certain states.

BofA stated that debit card usage fees would be applicable to basic accounts and would be in addition to any other monthly service fees. Further, the company affirmed that only those customers who get their debit cards swiped in any given month would be charged. However, using the card at ATM would not be chargeable. BofA also stated that the plan exempts premium accounts held by affluent customers including those linked to the Merrill Lynch brokerage.

What Are Interchange Fees?

For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (V) and Mastercard Incorporated (MA). This charged amount is called interchange fees. On average, banks charge a retailer 44 cents per transaction as interchange fee.

Extent of the Cap

From October 1, debit interchange fee provision would put a limit on interchange fees for big banks (with assets of $10 billion or more) at 21 cents per transaction. This represents a decrease of about 52% from the previous average, draining huge revenues from the industry.

How Are Banks Responding?

Almost all the U.S. banks are trying to find new revenue sources, as various regulations have lead to considerable revenue reduction since the onset of the economic slump. Some of the competitors of BofA – JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC) and SunTrust Banks Inc. (STI) – have already started or plan to initiate debit card usage fees in the range of $3–$5 per month.

What was the Aim?

The Fed’s proposal to slash interchange fees was mainly an effort to resist banks, such as BofA, from earning super-normal profits. This attempt was backed by the noble intention of trickling this money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.

In Conclusion

We believe that the main purpose of such laws is defeated as the cycle of cost shift is eventually projected to burden the consumers’ shoulders. Hence, the regulators need to perform a balancing-act in order to provide benefit to both the financial institutions and the consumers.

For BofA, we believe that many of its customers would stop using debit cards altogether or they would change their bank. Hence, in either case, the company would lose.

BofA currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

BANK OF AMER CP (BAC): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MASTERCARD INC (MA): Free Stock Analysis Report

SUNTRUST BKS (STI): Free Stock Analysis Report

VISA INC-A (V): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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