Monday, October 31, 2011

Where Did That B of A Debit Fee Come From?

How did that debit card charge come about? A little bit of history from a political and financial news junkie.

Let's go back a year or two, to the happy banking days, when debit card swipe fees were completely unregulated. B of A and the other banks were raking in the bucks by charging big debit card fees to stores and merchants for the privilege of accepting debit cards.

Obviously, the service isn't free -- costs to a bank are about 7 cents per debit card swipe.* And banks do deserve to make a profit. But on average, they were charging the stores 44 cents per swipe, which gave them about a 500% profit. (By comparison, if you put your own money in B of A today and buy a 12-month CD, you would get one-half of one percent interest. Just, y'know, for comparison purposes.)

How can banks charge that much? Easy. There is no competition because the market is run by a few huge companies. There is no way for newer, smaller companies to break into the business and offer lower debit card prices because the current service providers have a stranglehold on the market. So these few banks had all the retail businesses over a barrel. They could charge smaller businesses whatever they wanted for the privilege of letting customers use their cards, and the smaller businesses had to pay it.

So the retail businesses complained to Congress, which has the authority to regulate this kind of stuff. (But these days rarely does.) And in one of the very, very rare decisions Congress has made recently that benefits the overall country instead of the portion of the country with the richest lobbyists, Congress said to banks: "Stop. This is unfair and bad for the country's smaller businesses. Something closer to 70% profit is fair, so twelve cents a swipe is all you should charge." And they asked the Fed to create rules limiting swipe fees. Which it did. Kind of.

Of course, in the interim, the banks and Wall Street screamed bloody murder and went to their Congressional friends with their high-powered, high-money lobbyists and said they couldn't possibly earn enough money with only a 70% profit margin. They complained so much and so well that the Fed balked and refused to create the rule with the 12 cent limitation, so the bill was rewritten to allow banks to charge approx. 21 cents per swipe, or a 200% profit.*

But, according to B of A and other banks, that is still too low to let them make the kinds of profits they used to make. And they kind of have a point, because they were using those huge-profit swipe fees to make up for some really, really bad decisions made during the real estate bubble. Such as, oh, I don't know, actively seeking out borrowers who had no chance of repaying their loans and incorrectly assuming they could sell those loans to other suckers before the game stopped. (Bad decisions which got them tax write-offs for their losses and bailout money. Just sayin'.)

So B of A and other banks were now looking at the losses from their other areas and saying, "Wait! What about our profits?!? We want our 500% swipe fee profit margins back!" But the rules protecting merchants from these fees have already gone into effect.

So B of A says, "Hmmm. We may be limited in what we can charge the retailers, but the law doesn't say anything about what we can charge our own customers!!"

And the debit card fee is born.

The end.

Not happy with your bank? Read this article on why Credit Unions are better.

* There are several different reports I've read which give different average cost per swipe, profit per swipe, etc., and the results are situation-dependent and not at all straightforward. (Some list cost at 7 cents, some at 8. Some lists expected profit from the original proposed rule at 70%, some at 100%.) But everything I've seen is within a few cents of what I've listed here, so I've gone with the numbers I saw originally. For more in-depth reading, go:


Postscript: And of course Congress has been listening to the lobbyists and is trying to deregulate and remove all rules on swipe fee limitations. Again.

Friday, October 07, 2011

So True It's Not Even Funny

(Thanks, Katie!)

P.S. I won't hate you for disagreeing with me, but at least read this first. Keep in mind that these people used taxpayers' millions to get back on solid footing after crashing the world economy, and then gave their executives multi-million dollar bonuses.

For the record, Goldman Sachs took $10 BILLION in bailout money from US taxpayers to stay afloat. This allowed them to stay in business through the recession while still paying their executives multi-million bonuses.