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Tuesday, October 11, 2011

The New Debit Card Fees

It made a bit of a splash in the news when Bank of America announced they will soon be charging customers who use their debit cards $5 during each month the card is used. Other banks are considering their own menu of charges. This is what happens when government caps one fee in the free market place: it gets passed on to another payer.

I'm a Bank of America customer (and a rare happy one at that). I also use my debit card before and after hours to make ATM deposits, so I was as concerned as all the rest. It also happens a reader asked me to comment on the story. Turns out I had to pay a regular hours visit to Bank of America because a check wouldn't scan through the ATM and so I gained a bit of in-person clarification. There is something to be said to talking to the people right in the bank. I don't care to reading bank small print.

Here is what I learned: 1. The fee will not apply to ATM transactions, only to debit transactions in the store. 2. The fee will not be charged to relationship customers such as checking account customers who hold their mortgage through Bank of America (which is a lot of people after many Countrywide loans were taken over by Bank of America). 3. There will be a warning to customers shortly, so watch your mailbox.

Those who are considering dumping the debit card should speak to their bank to see what it would take to become a gold/advantage/relationship customer or consider moving their checking into the bank where they can establish such a relationship. If the bank where you have some savings, brokerage, or your mortgage is convenient, it is worth consideration. On my to do list is to find out if I need to close a checking account at another local bank that is rarely used, but useful to have from time to time.

For some, debit card fees will leave them debating between cash or credit. Debit cards combine the benefits of cash and plastic. But with a $5 fee, is it worth it? That is a question each consumer will need to answer for himself or herself. While $5 seems like a lot, if I was choosing between cash/checks and debit, debit would win despite the fee. I can't imagine going back to the days of writing checks in the store (and trying to ignore the annoyed looks behind me while I write the check, have my ID checked, and record the damage). When it takes $50 or $60 to fill the tank of the minivan, do you want to carry cash?

I avoid convenience products like the plague, but plastic is an incredible convenient and a welcome addition. Going to the bank to pull cash out is just another thing that needs to be done. And, as I try to remind myself, each short trip isn't just time but also money. It has been a long time since 99 cent a gallon gas or even $1.50 per gallon gas. Gas isn't a negligible expense at all.

Choosing between debit and credit will be highly dependent on your personal spending habits and organization habits. Generally, if you run a balance or pay late fees from time to time, debit at $5 a month might be worth it.

What about the sole-proprietor and the small business? My recommendation: do yourself the favor and pay the fee if you can't manage with checks. Good records are a must and I've audited enough petty cash drawers to know that when it comes to cash, good records are near impossible to come by.


Anonymous said...

I am also a BOA customer. Before they even announced the new fee, I moved a lot of my money to a local credit union. I have long wanted to get away from BOA but was operating from inertia since I had all my electonic bill pay and auto withdrawals and deposits set up with BOA. The new fee is going to push me to change over to the credit union -- not because I don't want to pay the fee, but as a matter of principle. I was only with BOA because they took over the bank that took over the bank that took over the bank I was with many years ago. BOA generally treats its low level employees and smaller customers like crap while compensating those at the top with truyly obscene amounts even though the company was part of the mortgage/credit mess. Why not go with a local savings and loan, credit union or other small bank that did not contribute to the financial meltdown?

The smallish ($8 million) business where I work also recently switched from BOA to a local bank because the local bank provided better rates and service. These days, with ATM networks and everyone having on-line bill pay, there isn't much BOA can offer that small banks can't.

Miami Al said...

I use Bank of America because of their incredible business tools. They offer a free payroll service (federal only), and an inexpensive premium payroll service that includes state filings (Florida's state filing is just unemployment, so if you are willing to do 4 forms/year, it's free), which is MUCH less than using another payroll service. They also have a very inexpensive ACH/Wiring system, which for my business is a must, and a packaged system with 2 Checking + 1 Savings account, useful if you have a need to separate out a checking account (if you don't want your bookkeeper to have access to everything, for example).

We have enough business relationships with them that they'll waive any fees we ask them to waive, and having gotten into credit card debt in the past (business slowed down, but access to credit let me avoid cutting expenses as fast as possible).

I won't claim that Bank of America isn't evil, but it lets small businesses access features normally not available without a much larger banking relationship.

I switched from a local bank to Bank of America, and other than the fee nonsense, been generally happy with the move.

You can avoid the fee with a small credit card account, possibly even issued by Bank of America so you can pay same-day via Bill Pay, if the $5 matters. This is their attempt to shake out the smallish accounts that ONLY have a checking account with them and use their debit card.

This is bad, because it will push more people into the masses of the unbanked, but if you are a more serious user of financial services, you shouldn't have a big problem with getting the fee waived.

Anonymous said...

Al: We are getting all of those features from a local bank and more. For example, for a line of credit, BOA required a personal guarantee from the partners (owners) in my business and fees to maintain the line even when it was not being used, whereas the local bank did not. (We have been fortunate that we have not had to use the credit line, but it is good to have just in case there is a cash flow problem.)

Anonymous said...

I should add that any small business should shop around every few years on their banking services, just like you would shop around for anything else - i.e. new copiers, office supply vendors and phone/internet service when the current contract is coming up for renewal.

Miami Al said...

Anon 9:37,

Florida's local economy is VERY different. Many small businesses are REALLY small. When I went to get lines of credit in the past (pre-credit bust), the local banks ONLY wanted to do SBA programs that basically didn't work for us... they only wanted to do real estate lending, that was the business down here.

Bank of America does want personal guarantees, but does offer us lots of services.

It's a regional thing, if I was looking to do real estate deals and was raising capital from Latin America (therefore no personal guarantees), the banks would be falling over to help me, but for a business that actually operates, they are useless.

I'm sure that this isn't the case elsewhere, but reflects the nature of our local economy.

Anonymous said...

If I stay with Bank of America (and that's a big IF), my plan is to use my Discover card where I would have used my debit card, and that way avoid the $5 fee plus get more Discover cash back awards. I will carry some cash and a blank check for those few places that take debit cards but not Discover, or use my back up mastercard. I do not, however, recommend that plan for people who cannot or won't pay off their credit card in full every month.

JS said...

Why do people use debit cards? Using a debit card takes the money out of your account immediately, which necessarily means you have the cash available to pay for the charge. If so, why not just use a credit card and get some form of rewards? I suppose I'm assuming that switching from a debit card to a credit card won't turn a normally responsible person into a shopaholic. Is there some advantage to a debit card?

Julie said...

I find it interesting that you talk about not having to carry around cash to pay for gas. I pay for candy bars in the grocery store with my credit card, but I always, always pay for gas with cash. In my little corner of New Jersey, gas stations charge less when you pay with cash. (Totally legal because the different prices are clearly marked.)

ProfK said...

Slightly off topic, but BOA is not the only bank to be adding or changing charges. Before switching banks talk to the branch manager to find out what "surprises" are coming down the road. Citibank announced just a bit ago that there will be a $20 monthly charge for checking accounts unless you maintain a minimum of $15K in other accounts in the bank.

Anonymous said...

Am I missing something here? Go out, get a cash back credit card (most offer 1% back on everything), and every Friday before shabbat, pay it off entirely.

You get virtually the same result of a debit card, plus you avoid the fee and make everything you purchase 1% cheaper.

Zach Kessin said...

First of all There are now debit cards that offer rewards, so if you are using a credit card for the miles look into those. (Dave Ramsey even is promoting one).

As for the credit cards, I would avoid them. Studies have shown that when using a credit card people tend to spend more. If the $5 charge annoys you find a different bank! Really if you don't like BoA's service there are a lot of other banks in the USA.

I don't think Megabanks are evil (I work for one). I just think that if you are not really huge you don't register on their radar and smaller customers are better off with a local bank.

The annoying thing for me is that There are really no debit cards in Israel

Bob Miller said...

Government vs. Business is sorta like Spy vs. Spy in Mad Magazine. Every measure invites a countermeasure...

Lately, having had my (non-BOA) bank card account hacked twice (two card numbers in a row), I pay by check instead of bank card whenever possible. Online transaction security is breachable.