The Empire Strikes Out

Bank of America has struck out with its controversial plan to charge debit card customers $5 a month just to use their money. When customers complained and started to cancel their BoA accounts, many in favor of local credit unions, Bank of America dropped the plan.

Bank of America had to do this, they insisted, because of a law Congress passed that limits "swipe fees," the fees the banks charge retailers when you use your debit card. The regulation limits the swipe fee to 21 cents; swipe fees had averaged 44 cents before the regulation went into effect last month. (The original proposal was a 12-cent swipe fee, but regulators were convinced that was too low.)

I can remember a time when banks actually paid me to keep my money there. These days interest rates are essentially zero and the banks have fees for every imaginable thing -- depositing money, withdrawing money, talking to a teller, using ATMs, having a checking account, and on and on. (Banks are charging more fees because they're not making money the way they used to, by making loans.) Most of these fees can be avoided by maintaining minimum balances that can range up to tens of thousands of dollars. But that means people who don't have a lot of money wind up spending a lot of money just to have access to a bank account.

People who can't afford a bank account often have to pay companies just to cash their paychecks. These outfits frequently charge a lot for the privilege, and often make shady pay-day loans at exorbitant interest rates. For all the bad things Wal-Mart has done, this is one area where they may well have helped people out: they charge just $3.00 for cashing payroll checks.

Fortunately, most local not-for-profit credit unions have some form of a free checking account. Credit unions are basically customer-owned banks. They're often formed for employees of big corporations, union members, or government employees, but many allow anyone to join.

Some critics of the Dodd-Frank bill, whose provisions resulted in the swipe fee regulation, are trumpeting BoA's backtracking on the debit card fee as a victory for the free market. It is, no doubt about it. But this free market win is a direct result of the swipe fee regulation -- without that law, the big banks would have continued to silently charge retailers more than twice as much as they're charging now. That's money that we wind up paying in higher prices at the grocery store, gas station and shopping mall. Money that goes not to the retailer, but to some big bank.

The free market can work very well, but only when customers are aware of what's really going on. When banks make their profits in ways that aren't apparent to their customers, their customers can't make informed decisions about which bank provides the best service for the lowest price. The high swipe fees were essentially an extortion racket that allowed the big banks to use their monopoly position to gouge local merchants for providing a convenience option to their customers. This caused invisible price hikes on everything you buy with your debit card. (People who pay cash get socked the worst, but that's a separate issue.)

BoA figured it was their right to maintain their current profit margin by charging their customers directly for something that they had been making money on through transactions hidden from their customers. Their customers disagreed.

In the short run we probably won't see any price cuts at the checkout counter. But in the long haul the cost of doing business will be lower for merchants and that will ultimately result in more money staying local, resulting in healthier local businesses and more local hiring. Which seems better than sending all that extra money off to the banks so that they can give their execs more outrageous bonuses.