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Debit fees remain a vexing issue for banks

January 27, 2012

| Money Rates Columnist

After years of offering free debit cards, financial institutions are not likely to sell consumers on the idea of paying for the convenience of using them, according to a recent survey. The finding underlines the challenge that banks face in making up for the decline in revenue caused by financial regulations imposed last year.

The report from Javelin Strategy & Research, a financial industry analyst, found only 17 percent of consumer would continue to use their debit card if it came with any usage fees. The report also discovered that while plastic is a popular option, cash remains the most commonly used payment method.

How Americans pay for purchases

The Javelin report collected survey data from 3,200 consumers to evaluate how they paid for purchases as well as their attitudes toward various payment scenarios. Overall, respondents indicated cash was their most regularly used payment method with 79 percent reporting cash usage in the past seven days. Of those considered underbanked, 72 percent prefer cash to prepaid cards, credit cards or other payment methods.

While cash is popular, 73 percent of consumers surveyed say they are satisfied with their debit cards. However, that satisfaction doesn't translate into a willingness to pay for the convenience. Of the 83 percent who said they wouldn't use their debit card if it came with a usage fee, the following percentages said they would choose these alternatives:

  • Pay with cash - 32 percent
  • Pay with a credit card - 25 percent
  • Switch to a bank that doesn't charge debit card fees - 26 percent

"Consumers love their debit cards, but the majority would choose different payment options if they were charged a fee for using debit," said Beth Robertson, Director of Payments Research at Javelin, in a press statement.

New regulations for swipe fees

The question of whether consumers would pay bank fees for debit cards isn't merely academic. Changes in federal regulations have left financial institutions facing a collective $12.2 billion decline in revenue. The decline was caused by new federal swipe-fee rules on debit cards that went into effect last October.

Prior to the implementation of the amendment, merchants bore much of the cost for debit card transactions. On average, retail businesses would pay 44 cents each time a debit card was swiped like a credit card. The Durbin Amendment limits the merchant transaction fees to 21 cents plus 0.05 percent of the sale total. Financial institutions with fraud-prevention standards in place can also charge merchants an additional cent.

The lowered merchant fees have meant a significant hit to the bottom line of banks. In response, some banks have floated the idea of charging consumers for their debit cards, but such proposals have been met with significant resistance. Bank of America found itself in a firestorm when it announced a $5 monthly fee for debit card use. After public outcry, the bank cancelled the planned fee.

With debit card fees highly unpopular, financial institutions will likely try to find another source to help pay the swipe fees, which means consumers should remain on the lookout for new bank fees on their checking accounts.

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