(BAC) Bank of America Calls Off Debit-Card Fee

Bank of America Corp. (BAC) has called off its plan to charge a $5 monthly fee on debit card purchases on Tuesday, but only after a hostile response from consumers and lawmakers nationwide. The company was under pressure to drop debit card fee as some of its rival companies including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) already took similar actions.

Debit card fees became an industry trend last month after banks started suffering from revenue losses due to the imposition of the debit interchange fee (proposed by the Durbin Amendment) effective October 1. The new federal rules restricted banks’ ability to charge merchants whenever a card is swiped.

Consequently, BofA and its peers were gearing up to charge its debit card users, so as to recoup some of their revenue losses. BofA’s debit card usage fees would have been applicable to basic accounts starting January 2012.

BofA, the nation’s second largest bank by assets, supposedly took this move in response to customer feedback and the changing competitive marketplace.

Now that the mega banks are taking a step back, many other U.S. banks including SunTrust Banks Inc. (STI) and Regions Financial Corp. (RF) are mulling over calling off debit card fees plans.

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 swipe as interchange fee.

Extent of Revenue Loss

Since October 1, the debit interchange fee provision has capped 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 out huge revenues from the industry.

According to the data compiled by Bloomberg Government, the limits on interchange feesmay cut the annual revenues of large U.S. banks by about $8 billion.

The Aim

The Fed’s proposal to slash interchange fees was a desperate move to stop large banks from earning super-normal profits. This attempt was backed by the noble intention of infusing this money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.

In Conclusion

We believe that the main purpose of slashing interchange fees would have been defeated with the imposition of debit card usage fees by banks as the cycle of cost shift would have eventually fallen on consumers’ shoulders. A balancing act was much needed to benefit both financial institutions and consumers.

And just when these banks started to have it their way, an outcry from consumers and lawmakers echoed right across the nation. The banks have bowed to the pressures of the people, but whether they will be able to deal with the interchange fees profitably remains to be seen. There must be other ways to recover revenue loss. The sooner U.S. banks figure those out, the better.

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

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MASTERCARD INC (MA): Free Stock Analysis Report

REGIONS FINL CP (RF): 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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