Debit Card Fees and the Law of Unintended Consequences

Steve Topper July 21st, 2011
Marketing Insights

What’s this?

Consumers threaten to return to writing checks.

Frequently in life, upon making a decision, we don’t get what we want.  We get something else – usually something undesirable.  Some say we get what we deserve.  It’s the result of failing to consider the law of unintended consequences.

For example, in late June, California Governor Jerry Brown signed into law a bill forcing Amazon to start collecting sales tax on all sales made to California residents.  The goal was to raise approximately $317 million a year in new sales taxes to help the struggling state.

What the law of unintended consequences delivered instead was Amazon firing its approximately 10,000 affiliates so it wouldn’t have to collect this sales tax.  So, now California is not only not going to collect the anticipated sales tax, it’ll suffer the loss of income tax from these 10,000 affiliates, not to mention some will undoubtedly start collecting unemployment benefits.  Others may move out of state.

So, instead of generating more money, the state stands to lose more money.

Score one for the law of unintended consequences.

Even though Amazon had dropped affiliates in at least five other states over the same tax issue, the politicos in California believed that somehow the outcome would be different in their state.  They simply ignored the law of unintended consequences.

If we can believe the results of a recent survey, the law of unintended consequences will deliver its undesired results to thousands of banks and the financial system as a whole – not to mention millions of happy debit card users and retailers.

One early outcome of the onerous, 2,489-page Dodd-Frank Wall Street Reform and Consumer Protection Act was to lower the debit card interchange fee from about 44 cents per transaction to 21 cents for larger banks.  While the desired outcome was to allow retailers to lower prices by paying less in interchange fees, the actual outcomes will surely be much different.

First, does anyone really believe retailers will lower prices as a result of paying lower interchange fees?  Even if one or more claim to do so, you’ll never notice it.

Second, even before the actual decision on the amount of the interchange fee was made, banks were busy dumping their expensive debit card rewards program – much to the dismay of many consumers.

Third, now these same banks are busy threatening to:

  • Charge an annual debit card fee.
  • Charge a monthly debit card fee.
  • Introduce a per transaction fee.
  • Limit the number of debit card transactions allowed each month.

Already, Chase is testing a $3 monthly debit card fee in northern Wisconsin.  If it goes into effect later this year, how many lemming banks will climb aboard this bandwagon?

Now for the survey results.

The recent poll was commissioned by the Associated Press and conducted by GfK Roper Public Affairs.

In it, consumers were asked a number of questions about what changes, if any, they will consider making in their use of a debit card if banks start charging a debit card fee.  The results should be a giant wake-up call to bankers considering such fees.

Here’s the shocker – 61% of respondents said they will switch to another form of payment if their bank or credit union begins charging a $3 monthly fee for debit card use.  The number jumps to 66% for a $5 fee and rockets to 81% if the fee is $7 per month.

This, my loyal readers, is the law of unintended consequences hard at work.

So what other forms of payment are we talking about here?

Paper checks, credit cards, and cash.

Yes, paper checks.

As an aside, are you aware that on December 16, 2010, it was decided in Great Britain that paper checks would be eliminated by 2018?  This piece of legislation was pushed by the UK Payments Council that sets strategy for all UK bank payments.  Sweden and Norway have already eliminated the use of paper checks.

With paper check usage dropping in the U.S., pushed along by Check21, how likely is it that we’ll soon be following the lead of the British?  The last thing we need now is for check usage to grow in volume.  Imagine the slowdown in the checkout line if millions more consumers begin writing checks.

When asked about preference, 80% of respondents said they would be somewhat likely (27%), very likely (25%), or extremely likely (28%) to switch to cash.  66% responded they would be somewhat likely (24%), very likely (19%), or extremely likely (23%) to switch to paper checks.  Only 40% said they would be somewhat likely (19%), very likely (10%), or extremely likely (11%) to switch to using a credit card.  The credit card numbers suggest the impact the ongoing recession has on consumers’ aversion to using credit.

While there was no mention of prepaid debit cards in the survey results I read, these cards present another option.

Obviously, not only was the Dodd-Frank bill misnamed, the government bureaucrats and politicians creating and passing it failed to, once again, think long and hard about the law of unintended consequences.

I’m still waiting to see if any consumers are actually protected by this massive piece of unfolding legislation.  I won’t be holding my breath.

Before your bank or credit union begins making negative changes to your checking account product menu, it would behoove you to sit down and consider every possible outcome created by the law of unintended consequences.

And yes, dropping free checking, increasing fees, adding new fees, dropping rewards programs, adding performance requirements, and minimum balance requirements all qualify as negative changes – no matter how much time and effort you spend trying to spin such changes as being improvements or enhancements.

All these negative changes are causing millions of checking customers to leave their current bank.  Don’t assume that because your bank isn’t a big bank that some of your customers won’t drop you like a bad date if you mess with their checking account.

Mike Moebs, CEO of Moebs Services, estimates that 4 million customers left the 30 biggest banks in 2010 because of fee changes.  He’s expecting an additional 11 million to leave this year.

Think long and hard about following in the footsteps of the big banks.  And never forget about the law of unintended consequences.

This content is accurate at the time of publication and may not be updated.