Jeff Gelles: The firestorm over fees

Is this really a battle America's megabanks want to re-fight?

The tempest over Bank of America's new $5-a-month debit-card fee, and word that other large banks plan to follow suit, has spawned a new set of storms.

Some Occupy Wall Street protesters portray the new fee as the latest example of the financial industry run amok. One group is touting Nov. 5 as "Bank Transfer Day" and urging consumers to switch their accounts to credit unions. Another, the Progressive Change Campaign Committee, is promoting a national "Move Your Money" movement that it says already has 80,000 adherents.

They may be following the lead of U.S. Sen. Dick Durbin (D., Ill.), who set this story in motion last year with an amendment to the Dodd-Frank financial reform that directed the Federal Reserve to limit debit fees to an amount "reasonable and proportional to the cost incurred by the issuer."

Within days of Bank of America's announcement, the big banks and their allies were labeling the new charge "the Durbin fee," and Durbin was shooting back.

"I'm honored to be associated with an effort to reduce costs to retailers and consumers across America," Durbin said in a Senate speech.

He also offered advice to Bank of America customers: "Vote with your feet. Get the heck out of that bank and find yourself a bank or a credit union that won't gouge you for $5 a month, and still will give you a debit card that you can use every single day."

Last week, Rep. Jason Chaffetz (R., Utah) and Rep. Bill Owens (D., N.Y.) fired a return volley, proposing to undo damage they said Durbin's amendment had caused.

"Congress must repeal this egregious provision that increases the costs of doing business on everyone," Chaffetz said, drawing a quick echo, and promise of support, from the American Bankers Association.

"This unprecedented transfer in costs from retailers to consumers - the result of government price-fixing - has resulted in consumers paying higher fees for basic bank services," said ABA general counsel Kenneth Clayton.

Clayton himself was doubling down on a position laid out right after Bank of America's announcement by ABA president, Frank Keating, who said the Durbin amendment "capped debit-card fees below industry costs."

"This provided big-box retailers with $7 billion in windfall profits while forcing banks to lose money on every debit-card transaction," Keating said. "Many economists predicted that this direct transfer of costs from retailers to everyday Americans would result in higher fees for basic banking services and threaten our nation's community banks. Unfortunately, we are now seeing that result."

But are we? Or are we seeing something else - such as a banking industry that got used to fat profits from debit fees and hopes to maintain them by any means possible?

Let's take a deep breath and review what actually happened.

Yes, Congress and the Fed ventured into unusual territory: price regulation. But they did it based on abundant and growing evidence that something was seriously out of whack with debit-card fees.

Retailers, large and small, had complained for years about "swipe fees" - their favored, double-edged term for the charge generated when a consumer swipes a magnetic card though a card reader.

The problem was compounded when Visa and MasterCard came to dominate the debit-card industry, pushing their "signature debit" model to replace the more-secure PIN-based cards that had evolved from ATM cards popularized in the 1970s and '80s.

In partnership with banks, Visa and MasterCard priced debit purchases like credit transactions, typically taking a 2 percent to 3 percent fee, in contrast with the small, flat fee charged by the PIN networks.

Over the last decade, as Visa and MasterCard have driven out regional competitors, the prices have largely converged in the range of 1 percent to 2 percent - a level the Fed found to be far above most banks' actual costs.

Before the Oct. 1 rule went into effect, the issuers' charges averaged about 44 cents for an average $38 debit purchase, according to the Fed's analysis.

And what price did the Fed find to be "reasonable and proportional" to the actual cost? Initially, it proposed caps of about 7 to 12 cents per transaction - a limit it essentially doubled, to an average of 24 cents, after banking-industry pushback.

To Mallory Duncan, general counsel of the National Retail Federation and leader of the broader Merchants Payments Coalition, the new cap is an improvement but no panacea.

"Basically, the Fed bent over backward to give the banks a big sloppy kiss, and that's how it got as high as it did," Duncan told me Friday, saying the Fed had doubled a limit that already allowed "a 100 to 200 percent markup," even though the Fed did not build any profit into its calculus.

Card issuers may be fighting back in ways beyond monthly fees, said the coalition's Rachel Wolf, who added issuers are initially treating the new limits as a floor - nearly tripling what used to be an 8-cent fee for under-$2 purchases.

But at least the Bank of America fee, and other efforts by banks to recoup as much as $7 billion or $8 billion in lost fees, have made one thing clear: Debit cards were never free. Consumers were paying those billions - we just didn't know it. And right now, with the oddest of timing, the big banks seem to be itching for another fight.