Capitalizing on consumer outrage over a $5 monthly debit card fee Bank of America Corp. plans to impose, U.S. Sen. Dick Durbin, D-Ill., is urging smaller banks to seize the “competitive opportunity” and go after unhappy BofA customers while suggesting the issuer would prefer its customers use credit cards instead.

BofA last week announced plans to introduce the monthly debit card fee next year (see story).

Durbin announced during an Oct. 4 press conference that BofA’s goal in imposing the new fee is “to make debit cards more expensive” for consumers because of a Federal Reserve Board rule that went into effect Oct. 1. The rule caps the debit-interchange rate for large banks at 21 cents per transaction plus a few cents to cover fraud and other costs. Previously, debit interchange for large banks averaged about 44 cents per transaction, he noted.

By charging customers a fee for using debit cards, BofA hopes to steer more consumers to use credit cards for everyday transactions because credit card interchange rates, which are not regulated, are higher and generate more income, Durbin said.

“So if they can push people away from debit cards into credit cards, where it’s unregulated interchange fees, they make more money,” he said.

BofA representatives did not return PaymentsSource calls seeking comments reacting to Durbin’s concerns.

Durbin in an appearance on the Senate floor on Oct. 3 also asked BofA CEO Brian Moynihan to provide reasoning for the $5 debit fee (see story).

In a letter to Moynihan, Durbin said that if BofA’s estimated 38.7 million debit card customers each pay a $5 monthly debit fee, BofA would pocket $2.32 billion “on top of the enormous profit it will already receive under the Fed’s swipe-fee rates.”

According to Durbin, BofA previously reported that it anticipated a revenue loss of about $2 billion with the 12-cent debit-interchange rate cap the Fed initially proposed. With the Fed’s final rule setting a rate much higher than that, it “will result in a windfall for your bank with swipe reform as an excuse,” Durbin wrote.

“I’m calling on Moynihan to justify this (new) fee,” Durbin told lawmakers.

Citing various BofA practices over the past few years that ran afoul of consumer advocates in its handling of mortgages and debit-overdraft fees, Durbin during his Senate appearance also exhorted BofA debit customers to find another bank.

“Vote with your feet. ... Get the heck out of that bank. Find yourself a bank or credit union that won’t gouge you for $5 a month and still will give you a debit card that you can use every single day,” Durbin said.

Durbin also sent a letter to Illinois-based banks and credit unions on Oct. 4 urging them to “seize this competitive opportunity” and step up to provide services for consumers looking to move their deposit accounts from the largest banks to smaller financial institutions.

Contrary to community banks’ earlier concerns, Visa Inc. and MasterCard Worldwide adopted a two-tiered debit-interchange rate schedule exempting institutions with less than $10 billion in assets from the Fed’s new, lower debit-interchange rates, the letter notes.

Durbin assured the smaller banks that he plans to stay alert to the possibility that Visa and MasterCard may act in collusion with large banks to “adjust rates over time in a way that diminishes the ability of smaller institutions to issue debit cards.”

To help ensure the card networks uphold the exemption for smaller institutions, Durbin said that in a recent committee report on his bill providing Federal Trade Commission funding for 2012 he included language directing the commission to issue a report within one year ensuring card-network compliance with the new debit-interchange rates.

Asked by reporters at the Oct. 4 press conference whether he plans to initiate any legislation to cap credit card interchange rates, Durbin said he is “not ruling out anything at this point” but said there is no pending legislation on credit card interchange.

Separately, the Washington, D.C.-based Retail Industry Trade Association this week reportedly said it plans to lobby for new credit card interchange regulations. Representatives from the association were not immediately available for comment.

JPMorgan Chase & Co. and Wells Fargo Co. are testing a $3 monthly debit card fee in some states (see story).

Citigroup Inc. also has announced a new, higher fee for one of its checking accounts but did not impose a debit card fee (see story).

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