A debit-card fee lesson: Sometimes, cash is king

Michelle Singletary
Columnist October 4, 2011

For most people, spending an extra $60 a year wouldn’t bankrupt them. Heck, a family of five can drop that much money to see a bad
3-D movie and not really complain.

So why all the fuss about Bank of America’s announcement that it would start charging some customers $5 a month — $60 a year — for debit-card purchases?

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

Yes, it’s true that when debit cards were introduced, financial institutions heavily promoted them as a free way to quickly make purchases and access your money. But just because something was free once doesn’t mean it can be offered free forever, right?

Don’t the banks have a right to charge for the convenience they provide to customers who don’t want the burden of carrying around cash or a checkbook?

Isn’t your time worth money?

Think of the time and effort it takes to pull out, count and hand your cash to a cashier. And let’s not talk about the hassle of actually writing a check.

Debit-card transactions take 30 percent less time than check transactions, according to the American Bankers Association.

Fast-food restaurants process debit-card transactions in less than five seconds, says the ABA, citing a 2010 survey by Pulse, a leading ATM and debit network. Meanwhile, cash can take as long as eight to 10 seconds. When using a debit card instead of a check, an individual saves 20 seconds on average.

Here’s the thing. The fact that some banks, not just Bank of America, are going to charge for debit-card purchases shouldn’t have been a surprise if you’ve been following the news. When merchants or service providers accept a debit card, they have to pay what’s called an interchange, or swipe, fee. This averaged 1 percent to 2 percent each time a card was used to cover a transaction. On average, large issuers got 44 cents per debit-card transaction.

Merchants and financial institutions have been fighting a long time over the interchange fees. Merchants thought the fees were excessive.

When the Dodd-Frank Wall Street Reform and Consumer Protection Act required the Federal Reserve to establish standards for debit-card interchange fees, many in the banking industry warned that new fees would be implemented to make up for lost revenue from an interchange-fees cap.

Effective Oct. 1, the Fed established a cap that, when combined with a standard fee structure and an allowance for fraud prevention, reduced the interchange fee to about 24 cents.

This past spring, an ad campaign funded by the Electronic Payments Coalition, which includes credit unions, banks and payment-card networks, warned that the swipe-fee cap would make debit cards more expensive or less convenient — and perhaps extinct.

“Make no mistake about it, these fees are the direct result of government price-fixing that has fundamentally altered the economics of offering a debit card,” said Frank Keating, president and chief executive of the ABA.

The ABA says it’s important to note that the institutions use the interchange-fee revenue to create new, better and more flexible products.

Oh, goody. Maybe technology can eventually advance so you can just blink and pay.

But you know what? Maybe this trend to charge for debit-card purchases is a blessing for struggling households. Maybe it’s time we wean ourselves off using plastic so heavily. I’ve repeatedly cited university studies that show when consumers use credit or debit cards, they spend more than when they use cash or checks.

In laying out the benefits of debit cards, the ABA says people “don’t have to anticipate every purchase in advance and ensure that they have sufficient cash in their wallets” or in their bank accounts (thanks to overdraft protection).

A few years ago, Visa had an advertising campaign in which customers using cash were seen in various commercials slowing down the payment process. When they used cash or a check, everything came to a screeching halt. The cash-paying customers got harsh looks from debit-card users and the cashier. In one commercial, the announcer said: “Don’t let cash slow you down.”

Translation: The faster the payment process, the less time you’ll have to think about the money you’re spending, and that means more money going to the financial institutions.

If you’re unhappy about being charged to use your debit card, then find an institution that doesn’t do it. There’s a good search tool at www.findabetterbank.com.

But also consider just going back to using cash. The move by Bank of America and other banks proves once again that cash is king.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Questions are welcomed, but because of the volume of mail, personal responses may not be possible.

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