Bank of America defends fee, small banks see opportunity

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So how elastic is consumer demand for debit cards and checking accounts?

We may be about to find out. It's fair to say that the move by Bank of America to hike debit card fees on its millions of retail customers has not gone over well. My favorite was the FOX anchor who cut up her card on the air in protest. "Right here, right now, I'm going to show Bank of America what I think of their fees," she said, wielding scissors.

Lots of less prominent customers are likewise criticizing the move via Twitter and other social media outlets. Some have speculated the bank's widely reported problems with its web site recently was the linked to its fee hike, but there is no evidence that hackers have targeted the bank as a revenge play.

Consumer advocates are suggesting that people simply switch banks. But how many actually will swap remains to be seen. And that really is the big question. The process can be a real pain, to be sure. Bank of America is betting that demand for its consumer services is relatively inelastic. It has judged that that while some consumers will leave, enough will remain such that the price hike actually leads to more revenue. The bank is under massive pressure to offset the loss of billions it stands to lose in debit card swipe fees from merchants. The Durbin Amendment is now in effect. And it was no coincidence that the bank timed the new debit card fee to go into effect on the same day that the interchange caps went into effect.

The big experiment here is whether Bank of America will indeed lose more customers than it projected. It's fair to say that small banks and community banks are doing everything they can to flatten the demand curve. They sense an historic opportunity. Paco Rivera, Executive Vice President at Houston-based Green Bank said that, "Many community banks are not as dependent on fee income to produce revenue.  For many of us, Dodd-Frank had an unnoticeable impact on operations, but has given us new opportunities to target the clients of the national banks.  The ability to offer business checking with interest has started to open doors for us, these new fees will do the same. Green Bank (of Houston) is not planning on charging a debit card fee.  In fact, for most of our clients, we'll refund the fees that other banks charge for using their ATM machines."

Even some politicians are urging customers to move with their feet. One intends to sponsor legislation that will make it easier for consumers to switch banks.

Is this a looming disaster for Bank of America? We'll have to see.  

At this point, all big banks would be wise to try the educational route to some extent. The days of fee-for-service may be back with a vengeance. Certainly, most telecom companies have eschewed the idea of unlimited usage accounts. Power companies would never think of moving away from charging per usage. Maybe it's time that the bank industry moves toward a transparent system where all fees are laid out in front of the consumer, allowing them to clearly see what they are paying for. Most consumers get that nothing is really free, not even those toasters banks used to give away.

It may be that Bank of America is suffering in the court of public opinion more for its methods than for the actual act of hiking fees. It certainly could have rolled out the fee better, perhaps giving people even more advance warning and doing a better job of explaining why it was imposing the fee. That said, the issue is likely to die down quickly. Despite all the anger, we may not see mass defection from the bank. -Jim