Originally published September 29, 2011 at 9:33 PM | Page modified September 30, 2011 at 1:15 PM

Banks take swipe at debit-card users with fee

New federal debit-card rules won't kick in until Saturday, but Bank of America has wasted no time in announcing a $5 monthly fee for such purchases to make up for an expected drop in revenue.

The new fee

Beginning next year, in select states, most customers who make a debit-card purchase will be charged $5 a month.

How to avoid it

Those with top-tier accounts, requiring $20,000 to $50,000 in combined balances, and college students with an existing CampusEdge account will be spared.

Source: Bank of America

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New federal debit-card rules won't kick in until Saturday, but Bank of America has wasted no time in announcing a $5 monthly fee for such purchases to make up for an expected drop in revenue.

The rules in question will limit how much banks can charge to process debit-card transactions. Those fees, paid by merchants, now average 44 cents per sale. The Federal Reserve has determined that a charge of no more than 24 cents is a "reasonable and proportional" amount.

Industrywide, such processing fees brought in $19 billion for banks in 2009, according to the Nilson Report, which tracks card payments. For its part, Bank of America estimates the rules will cost it about $2 billion annually.

The Charlotte, N.C.-based company joins rivals including Wells Fargo and JPMorgan Chase in rolling out the charges. Bank of America's announcement carries added weight because it is the largest U.S. bank by deposits.

The bank's new fee will be rolled out in stages starting with select states, which were not disclosed. Customers could use the bank's ATMs without charge, but would be socked for $5 in any month they made a debit-card purchase, whether they did so once or 100 times.

Anne Pace, a Bank of America spokeswoman, said customers rely on such services as fraud and overdraft protection, and those services can't be offered for free. "That convenience comes at a cost," she said.

Asked how much a debit-card transaction costs Bank of America, Pace declined to answer. She also wouldn't estimate how much it costs the bank to provide fraud and overdraft protection.

Some consumer advocates say the actual cost of debit-card transactions to banks, thanks to the huge volume of such sales processed daily, is a penny or two.

Wells Fargo will begin testing a $3 monthly debit-card fee in Washington, Oregon and three other states next month.

JPMorgan Chase is experimenting with a similar fee in Wisconsin, now charges for a paper statement and is exploring other fee increases, including for online banking, according to people with knowledge of the matter. Customers that Chase inherited from Washington Mutual also no longer enjoy free checking accounts.

Citigroup, the third-largest U.S. bank, is one of the few major banks that has said it wouldn't charge additional fees for debit-card usage.

Debit cards have been promoted for years as a free and easy way to pay for goods and services. But the costs of using those cards were offset in part by fees reaped from other services and penalties, and which now are being limited by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The debit-card fees are in addition to monthly maintenance charges banks restored this year on many checking accounts after luring customers for more than two decades with free checking.

"There's no question we're going to see more of these types of charges," said Trish Wexler, of industry lobbying group Electronics Payment Coalition. "The bottom line is that all of us consumers will be paying more."

But Sen. Dick Durbin, D-Ill., who authored the swipe-fee legislation, accused Bank of America of trying to find "new ways to pad their profits by sticking it to its customers. It's overt, unfair, and I hope their customers have the final say."

Patricia Hewitt, director of debit-advisory services for the consulting firm Mercator, said it is too early to tell how consumer behavior will change. Roughly one-quarter of such purchases are less than $10, a sign that many use the cards to replace cash.

On average, Americans swipe their debit cards 16 times a month, she said.

"It's going to take a while for this to play out," she said. "It certainly could motivate some consumers either away from debit or to other payment forms."

Bank of America said customers could avoid the new debit-card fees much the way they can avoid maintenance fees on checking accounts.

The company this year introduced five new accounts. Users pay fees unless they maintain minimum balances, make regular deposits, use credit cards or take advantage of online services.

Only the top two tiers of accounts — dubbed Premium and Platinum Privileges and requiring $20,000 and $50,000, respectively, in combined balances — will be spared from the new debit fees, spokeswoman Pace said. Those with an existing account for college students called CampusEdge also will be exempt, she said.

At a Bank of America branch in Los Angeles, some longtime customers said they may switch to a regional bank or credit union.

One candidate for a debit-card-fee waiver, Guadalupe Garcia, a program manager at the University of Southern California's medical school, headed for the on-campus credit union Thursday to switch from Bank of America.

"I am very fortunate in that I saw a large increase in salary over the last couple of years," Garcia said. "I know I am the kind of customer [Bank of America] consistently woos. That is why I feel a social responsibility to leave."

Compiled from the Los Angeles Times, Bloomberg News, The Associated Press, The Washington Post and The New York Times.

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