One of the potential consequences of implementing the Vickers report to ring fence retail banking from riskier investment banking operations is the end of “free” banking for retail customers – the likes of you and me. Banks are facing implementation costs estimated in the £billions, while at the same time facing limitations on their ability to cross subsidise their retail and SME operations with income and profits from investment banking. Fee paying current accounts are already here, wrapped up with insurance and other “loyalty” benefits for so-called premium account holders. Transaction charges for processing debit card purchases, cheques, direct debits, standing orders and the like are another possibility. However, the recent experience of Bank of America (BAC) is a warning to UK banks who are considering their options.
Regulations in the United States effective from 1 October 2011 have imposed a new cap on the fees banks can charge retailers and other vendors. The maximum fee retailers will pay is 24 cents per debit transaction. Prior to the change, the average was 44 cents, based on an average debit purchase of $38. BAC has said that the reduction in fees will cost them $2billion annually. To help offset this loss in income they are introducing a new monthly debit card fee of $5 which will be charged to their customers.
To say that the new $5 fee has provoked some flak would be putting it lightly. Senator Dick Durbin, who was behind the move to limit debit card swipe fees, was one of the first to denounce the new BAC fee as an “outrage”, urging BAC customers to vote with their feet and move their accounts to other banks. President Obama has joined the growing chorus, citing the decision by BAC to introduce the fee for debit card purchases as an example of why the US needs a strong consumer watchdog in the new Consumer Protection Bureau. Obama is quoted as saying that the new $5 fee is "exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening." In its defence, BAC is reported to have embarked on a major charm offensive with members of the US Congress and the Consumer Protection Bureau with the aim to avoid the Bureau trying to force a reversal of the fee.
UK banks considering similar debit card fees would do well to learn from the experience of their friends across the pond.