Wells Fargo’s announcement last week that it will start testing a $3 monthly fee Oct. 14 for debit card users kicked off a wave of speculation that more banks may follow.
Wells Fargo will test the fee starting Oct. 14 in five states — Georgia, New Mexico, Nevada, Oregon and Washington. The fee applies only to payments and purchases made with a debit card. ATM transactions will not trigger the fee, a Wells Fargo spokeswoman says.
The bank joins several of the nation’s largest banks in charging the fees, which come as banks scramble to make up the revenue they would have gotten from merchants had reform limits on swipe fees and overdraft charges not passed.
Passage of the Dodd-Frank financial reform law meant that earlier this summer, the Federal Reserve ordered a cap on what fees banks can charge retailers every time customers swipe their debit cards. Banks had been able to charge an average fee of 44 cents per swipe and under the new rules, which kick in Oct. 1, they can charge less than half that — up to 21 cents. That has them eyeing services that traditionally didn’t have fees, such as debit card accounts, as potential revenue sources.
“This was inevitable,” says Edward Sibbald, a former banker and director of the Center for Excellence in Financial Services of Georgia Southern University. “When overdrafts were restricted for banks last year, that, for many banks, cut out about 25 to 40 percent of their fee-based income. Then on top of that came the debit fee cutback.”
Under the new rules, interchange or swipe fees for banks with less than $10 billion in assets — which is most of the banks in the U.S. — are exempt from the caps.
Sibbald says the smaller banks are watching the big banks to see whether the strategy works or drives customers away. In the end, competition may force them to also charge the fees, though the fees may be smaller, he says.
“If you’re taking away these two primary sources of non-interest fee income that were allowing banks to offer things like free checking and offer rewards for using their cards, banks ultimately have no choice but to try to recover that,” Sibbald says.
More banks testing the waters
JPMorgan Chase is also testing a $3 monthly fee for debit card users in northern Wisconsin. SunTrust Banks launched new account offerings in June, including a checking account that charges customers $5 per month for debit card use. Regions Bank recently announced a debit fee of $4 a month for certain accounts in October.
The top 10 banks have about 60 percent of the deposit dollars in the country, so pretty soon fees on debit cards won’t seem out of the ordinary, Sibbald says.
“The merchants have now transferred their costs from themselves back to their customers. I think over the years you will also see the elimination of free checking and an assessment or annual or monthly fee for a bank debit card,” says Sibbald.
Banks are also looking at canceling rewards programs to bridge the gap. Wells Fargo, which had already canceled debit card rewards for new customers, announced this week it would end rewards points for customers already enrolled as of October. Chase and Sun Trust had already ended rewards for both new and existing debit card account customers this year.
South Florida consumer advocate and author Denise Richardson said though the Fed meant to protect consumers with the regulations, the fees that are resulting are having the opposite effect. And these changes may be the last straw for some where banks are concerned, she says.
“Already there’s been so much aggravation, starting with the bailouts. Consumers don’t see banks as helping them through this economic crisis. This may be what finally pushes them away. This will give them an incentive to go to credit unions and community banks,” she says.
Beth Robertson, director of payments research at Javelin Strategy and Research says Wells Fargo is likely testing the market to see what the tipping point is for customers’ tolerance of a debit card fee.
Banks would be happy if customers stayed and moved to paying with a credit card but if they leave, that will likely cause them to rethink the strategy, she says. The question is whether $3 a month is something customers can stomach.
“Is $3 small enough? That’s what Wells Fargo and others are testing—what’s the right price point that will cover some of the costs but not cause repercussions to our customers,” Robertson says.
An Associated Press-GfK poll conducted in June asked that question and found that 61 percent of respondents with debit cards said they would stop using them if their bank issued a $3 a month fee for using them. That number went up slightly to 66 percent when respondents were asked about a $5 monthly fee.
The number of those who said they would switch payment methods grew to 81 percent when asked how they would react to a $7 a month fee. Most who said they would switch were likely to switch first to cash, the study found.