Time to Stop Using Your Debit Card Part II

In August, I wrote about the prospect of banks charging fees on debit cards that are used in non-ATM transactions (see Time to Stop Using Debit Cards). With several banks testing $3 fees, I predicted there was no way it would end at that. Bank of America has now jumped on the bandwagon announcing a $5 monthly fee beginning next year for all bank customers that use their debit card for purchases. There will be no fee for ATM use. Of course, this is in addition to any other fees already charged on the bank account. The discussion now suggests that debit card use fees are the industry "norm." Wow! Even before the banks implement these new fees, the media is reporting them as the new standard.

Way back when banks first rolled out debit cards as a replacement for the traditional ATM card, I asked to send mine back. My worry, of course, was that there would surely be fees associated with the cards. And, would I know the fee was coming before the bank charged me. Well, it has taken some time for the fees to hit directly on user accounts (rather than indirectly through interchange fees), but welcome to the new world.

NPR ran a piece this week about the ability of small banks to lure new customers as these new fees hit. See Smaller Banks Use Free Checking. My suspicion is that many bank customers will not even notice the new fees . . . at first, but will be unhappy when they find out. Others who keep lower balances at some times during the month will not notice the fees until they've overdrawn their account. Then the bank may collect a $35 additional fee if the customer is enrolled in the bank's debit card overdraft protection program.

As for me, when these fees hit, I will not use my debit card for over the counter purchases. I can write a check at the grocery store or use a credit card for gas. After all, do you really think it will stop at $5 a month?

- JSM

Practical Payments Tidbits

I like to give my first year contracts students a bit of practical knowledge about commercial transactions and consumer issues whenever possible. So, I've taken to putting up articles on the overhead screen at the beginning of class. Sometimes we have a little discussion, other times right onto contracts doctrine. Today, we began class with this little MSN news piece on 5 places to never use your debit card!

• Rental or security deposits. This goes to the heart of what a debit card does, it takes money from your checking account. Using a credit card for car rental and similar transactions, these deposits are not charged so you are not out the money at the time.



• Restaurants and bars. Just to much risk of fraud with so many people around. And, your card is likely to leave your presence leading to a greater possibility of card skimming. Again, the money comes out of your checking account, so harder to get it back in the event of theft compared to handling potential losses on credit cards. Or use cash . . .



• Regular payments. What companies do you really want to have your financial information permanently on file with an ability to hit your checking account at will. Consumers have greater rights under the Truth in Lending Act if you use your credit card. Alternatively, pay them on an automated payment out of your checking account yourself. Of course, some businesses do demand the regular payment system and you might have to give in if it is the only way to secure a wanted service.



• Wi-Fi hot spots. Quite simply, unsecured access to your account numbers.



• Any retail outlet where you choose the "credit" option. This one doesn't bother me, but the article mentions the less rapid clearing and risk of overdrafts as reasons not to use the debit card.

For my part, it is always nice to see a little consumer education on a regular basis. The big reminder here is while debit cards look like credit cards, the attributes are not the same. Consumers are wise to keep this in mind.

- JSM

Time to Stop Using Debit Cards?

While my gripe about debit cards used to be the tricky overdrafts, apparently there is a new fee in town. . . . The debit card usage fee. Now that we've moved to a very cashless society, some banks are now looking to charge customers who want to use a debit card. Wells Fargo is now testing a $3 monthly debit card fee and JP Morgan has already tested the $3 fee! Ouch. Just $3 right? But overtime . . . And, we all know that $3 would just be the start. Surely, I am a cynic.



Banks argue that these new fees are in response to the Fed's cap on the fees they can charge retailers on card transactions. An Associated Press survey, though, says that 61% of consumers will find another way to pay if banks charge for using the debit card. Way to go consumers! I wonder, though, if this will turn out to be a tricky fee. For instance, do you get the monthly fee if you use your card in your own bank's ATM? In other ATMs?



At least at this point, Bank of America has not yet jumped on the debit card fee bandwagon.

New Rules of Bank Fees Now In Effect

Now that August has come around, there are new rules coming online to benefit consumers. One of my favorites is the overdraft protection rules for debit cards coming into effect on August 15, 2010 for existing bank customers (See FRB: New Overdraft Rules). In the past banks often charged a $34+ fee to consumers who use their card for debit purchases or ATM withdrawals when they do not have enough money in their account to cover the cost of the purchase or withdrawal. The new rules require banks to get consumer's consent (which they should not give) for these "programs."

While the big accomplishment here is disclosure with an opt-in system to benefit consumers using debit cards, as always, consumers can still make financial mistakes that result in fees (see, WSJ, Getting Going: Ferreting Out Those Hidden Fees). For instance, just because you don't opt-in to overdraft protection, that doesn't mean you cannot overdraw your account or be charged a fee for doing so. The new rules apply to debt and ATM transaction, so consumers can still overdraw their accounts and be charged fees for check and automatic bill payments. While this system may be much superior to the previous one, consumers must still mind their balances. The new rules don't eliminate overdrafts completely, leaving some protection for transactions that consumers typically want overdraft protection.

Is this enough? One worry is that banks may push consumers into opting in or consumers may simply not understand (see, USA Today, Bank Overdraft Fees). When opening an account at Chase Bank recently, I was asked to opt-in to overdraft on my debit card. While the clerk was not pushy, I was asked if I was "sure" and did I really understand. Oh, yes, I told them. While I did not opt-in, if a consumer does opt-in the rules may not go far enough. A consumer who opts-in won't get the warning at the counter that their account is low. They will just get the fee, even for the $4 cup of coffee, rather than the ability to choose another form of payment.

All and all, this is all good news for consumers, but banks will take a hit in revenue. Wells Fargo is expecting a $500 million loss in revenue for 2010 as a result of the overdraft rules (see, Wells Fargo Sees $500 Mln). Of course, banks will find other ways to make up the lost revenue. Hopefully, the banks will clearly disclose any new fees to consumers and keep fees manageable While simple fee disclosure for me is important, those with low incomes can be faced with the choice of paying fees or not having a checking account. Some have chosen not to have accounts at all. (see, USA Today, Many Shun Bank Accounts). Consumers opting out of banking completely because the fees are either undisclosed or too high is a lingering problem beyond the reach of the new rules.

- JSM

Hooray for Bank of America's New Overdraft Rules?

Is the end of the $39 cup of coffee in sight (See How Your $4 Cup of Coffee Can Cost You)? Today, Bank of America announced that it is doing away with debit card overdraft fees and will just decline consumer transactions that result in an overdraft on their debit card (See Bank of America to End Bank Overdraft Fees). Seems that is just what consumer groups have said for some time that banks should do, but that some banks claimed they couldn't technologically do. Bank of America is crediting itself with listening to consumer preferences on debit cards and their desire to help customers avoid unexpected fees. Bank of America has turned into the kinder, consumer friendly bank? Apparently, they are even notifying customers now when an ATM withdrawl will result in an overdraft (and a $35 fee), rather than just pushing the transaction through. But not to worry, Bank of America will continue to have overdraft coverage that most consumers want on their checks and routine account payments. Rather than trying to convince customers that they really want the $39 cup of coffee, Bank of America has apparently caved on this one. Good for them. Doing the right thing by customers (even if under pressure from the Federal Reserve) is a big step. Hopefully, this will set the tone for other large banks to follow suit. Apparently Citibank has stopped charging overdrafts on debit and ATM transactions.

For those banks not doing away with these fees, the Federal Reserve's new opt-in rules on debit cards are due to come into effect on July 1, 2010. The Federal Reserve’s Final Rules came down on the side of the consumer on many issues. Because the Truth-in-Lending Act applies to credit cards, but does not apply to debit cards, the Federal Reserve’s Final Rules are under the Electronic Funds Transfer Act (15 U.S.C. 1693 et seq.) (EFTA). The thrust of the Final Rules is primarily disclosure and consent based, rather than tackling some of the troublesome banking practices involved in the processing of overdrafts for enrolled customers and the amount banks charge for overdraft services. Specifically, the Final Rules ensure that:

(1) banks cannot enroll customers in overdraft services for ATM and one time debit card transactions without their consent (an opt-in);
(2) banks do not condition the payment of overdrafts on other items, such as checks and ACH transactions, on the customer opting-in for ATM and debit card services and cannot decline overdrafts on checks and ACH transactions for this reason;
(3) banks provide the same account terms, conditions and features to customers whether or not they opt-in; and
(4) the opt-in approach applies to existing and new accounts beginning July 1, 2010.

The Final Rules specifically declined proposals regarding the practice of debit card holds, suggesting instead that banks, networks, and merchants should address this problem.

With any luck, we'll see other large banks doing away with the debit and ATM overdrafts over the coming months. Seems easy enough just to deny the transaction at the counter. Not sure I'd say this, but good job Bank of America.

- JSM