Bank of America’s recent announcement that it was planning to charge a $5 monthly convenience charge for debit card users has already elicited a widespread backlash from both customers and politicians. Financial institutions, which tend to ratchet up their fees across a wide swath of their customer base to make up for lost income, have always banked on the “stickiness” of their customers. While customers may have been “stuck” several years ago, that is no longer the case. Companies such as Google, PayPal and Square are now offering a wide range of alternative payment mechanisms that could finally mean lower transaction costs for consumers.
Indeed, emerging technologies like NFC (Near Field Communication) could lead to financial disintermediation on a scale that the top brass at Bank of America never imagined. Alternative payment providers such as Google are set to shake up the way we make everyday payments by converting customers slowly but surely to the notion of the Digital Wallet. Square, founded by Twitter’s Jack Dorsey, is gaining momentum by making it possible for small businesses and independent contractors to accept card payments at the point of sale without the need to open a merchant card account. PayPal, viewed by many as only a way to settle online transactions on sites like eBay, is opening up a new pop-up store in New York City to showcase new payment alternatives for retail merchants.
Instead of competing with smaller community banks, the largest financial institutions will be forced to contend with new technology options that enable consumers to make payments at the point of sale, often without the need for a debit or credit card. (Google Wallet enables prepaid cards) This is exciting stuff if you’re a customer, and downright frightening if you’re a financial institution. It’s one thing to compete with a sleepy community bank for your business, it’s another thing entirely to compete with Google. When customers feel at home using tablets and smart phones to make payments, they have less inclination to pull a piece of plastic out of a leather wallet. For now, these payment alternatives have a significant amount of ground to make up before they truly represent a threat to financial institutions and the old way of doing business.
It is easy to see, however, that these technologies have the potential to reduce dramatically the fees associated with each banking transaction. This is really what’s at stake for financial institutions like Bank of America: the ability to collect a small fee on each and every transaction that customers make with their cards. Before the enactment of the Dodd-Frank legislation this summer, banks could charge merchants “swipe fees” as high as 44 cents per debit card transaction. That rate has now been capped at less than 25 cents per debit card transaction. That’s a nearly 50 percent reduction in fees, and banks are naturally turning to customers to help them earn back this income with the new monthly fees for debit card users.
Bank of America’s misstep — assuming that customers will gladly pay additional fees for the privilege of using a piece of plastic — is reminiscent of a similar pricing fiasco by Netflix, which has been criticized for applying aggressive measures to get customers to shift to a more profitable digital streaming model. DVD customers didn’t like it at all. Rather, they saw it as Netflix strong-arming them into something they didn’t want and didn’t need. In the same way, the new pricing move by Bank of America is being seen as a way to force customers to transition to financial products like credit cards that are more profitable for banks than debit cards.
It may be too early now to talk about the Law of Unintended Consequences, but years from now, we may owe a debt to reforms like Dodd-Frank for finally weaning us off the physical wallet and encouraging us to experiment with the new technologies helping to create the Digital Wallet. Why carry around a wallet full of plastic when your smart phone or tablet can do the same thing? Better yet, why pay higher fees for financial services when technology will soon make it possible to get a similar service at a cheaper rate?
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