Angry about new debit-card fees? Switch banks

A Bank of America customer at a Los Angeles ATM.The firm said it will charge a $5 monthly fee for purchases, but not at ATMs. (KEVORK DJANSEZIAN/ Getty Images)

Bank of America plans to impose a new $5-a-month charge - $60 a year - for the privilege of using your debit card, its favored alternative to cash and checks. Other big banks, including Wells Fargo and Chase, are testing the waters with new $3-a-month fees, according to reports such as this.

It's hard to say how customers will respond to the new fees, which are partly a response to new Federal Reserve regulations that go into effect tomorrow limiting how much banks can charge for processing debit-card transactions but also a response to earlier rules that clamped down on lucrative debit-card overdraft fees.  If you're unhappy with the fee, you may want to consider your own alternatives, especially at smaller regional banks or credit unions.

Before you make any moves, it's worth understanding what's going on, which is little tough to see clearly amid all the spin.

The new rules cap debit-card transaction fees at an average of 24 cents, the Fed says.  That includes a flat 21-cent transaction fee, plus a fee of 5 basis points - one-twentieth of a percentage point - based on the size of a transaction, which can be charged only if a bank provides fraud-prevention services. Use your debit card for a $5 purchase, and BoA will collect about 21 cents from the merchant. Use it for a $500 purchase, and BoA will collect about 46 cents.

The Fed says the smaller fees are "reasonable and proportional to the costs incurred by issuers" - the standard set by the so-called Durbin amendment to the Dodd-Frank financial overhaul, which was added after a big push by a coalition of merchants.  Without the rules, the Fed had said that fees averaged 44 cents per transaction, nearly twice as high.

Both of the new rules obviously took a big bite - billions of dollars - from the bountiful revenue generated by the Visa and MasterCard debit cards that banks, big and small, have long encouraged customers to use. The New York Times, citing Javelin Strategy & Research, says the new limit is expected to cost banks about $6.6 billion in revenue a year, on top of a $5.6 billion annual loss from the 2010 rules requiring banks to refrain from charging debit-card overdraft fees unless a customer opts into a program authorizing the bank to pay point-of-sale overdrafts rather than simply declining the purchase.

Some commentators have assumed, oddly, that banks can simply replace the revenue by charging for the transactions in other ways.  That was the argument the banks used throughout the debate over the Durbin amendment: If we can't take this money as a transaction tax from the merchants (OK, they didn't use the word tax, but that's what is is), then we'll take it directly from our customers in higher fees.

Thankfully, that's not how competitive markets work. Banks may try to raise their fees to recoup the lost transaction revenue,  as Bank of America is doing, but if they price their services too high, some customers can and will go elsewhere, or at least quit using their debit cards.

Last month, the trade publication Digital Transactions, also citing Javelin, said 60 percent of respondents to a 2010 survey "said any monthly debit card fee would cause them to switch to another payment form."

The latest round of fee increases is an opportunity to weigh the value you get from using debit card for transactions.

Is it worth $60 a year to have the money taken directly from your checking account, rather than using a no-annual-fee credit card and paying it off in full each month?  If you're worried that you'll inevitably start rolling over balances and building unwanted debt, it might be.

Would you rather pay cash for small transactions? If you don't like carrying money, or want an electronic record of every purchase, maybe staying cash-free is worth $60 a year to you.

Shop around, and you may find some surprises.  For instance, to compensate for not having a huge network of ATMs, one of Bank of America's key competiive advantages, some small banks offer to absorb some costs of out-of-network withdrawals.  In my neighborhood in Northwest Philadelphia, Valley Green Bank says it offers up to four out-of-network transactions per month to "free checking" customers. Some larger banks may eschew debit-card fee increases in an effort to capture a larger share of customers.

If you're thinking of switching, Consumers Union offers advice here, including a link to a PDF guide on how to change banks smoothly in an era when many people rely on preauthorized debits to pay key bills.

The biggest result of the new rules isn't higher debit-card fees. It's transparency: Banks, in concert with network owners Visa and MasterCard, had been charging merchants for transactions, and merchants had been building those costs into their own pricing decisions. Now banks can't charge as much - or, if they believe they can, they'll have to do so more directly.

Even so, banks, like retailers, can only charge what the market will bear.  So the key question now is: What will Bank of America's customers do?