November 3 2011
Bank of America's Debt Card Decision Doesn't Change the Problem of Costly Regulations
Carrie L. Lukas
Bank of America recently announced that it will drop a $5 charge levied on many debit card users. In many ways, this is evidence of the market working – consumers were very unhappy with this new fee, threatened to switch banks, and Bank of America decided that the downsides of imposing out-weighed the upsides.
Yet there is a danger that consumers—and legislators—will draw the wrong conclusion from this episode.
As IWF has written before, Bank of America moved to start charging for debit card use because of government regulations that now prevent banks from charging stores above a certain amount for accepting debit cards as payment. These price controls are creating a major loss of revenue for banks. And, as a result, it's less profitable for banks to provide consumers, particularly those with less money in the bank, who are also less likely to have access to traditional credit cards, with banking services.
This lost revenue changes banks' business model. Banks are taking in less money, which means they have to find new sources of revenue (such as by charging consumers more) or cut costs and services. As we've seen, banks have tried to do a little bit of all these things. They laid off workers, cut other services, and sought to impose new fees on consumers.
Consumers have managed to convince Bank of America to get rid of this $5 fee. But Bank of America still faces the lost revenue from new government regulations. So the real question is what is Bank of America's next move? One things is for sure, this isn't the end of the story.