A Lesson in Unnecessary Regulation

[badlydrawnjeff.livejournal.com]

By now, you've probably heard about Bank of America's plan to begin charging $5/month on the customer side for debit card usage. What you probably haven't heard of is why:

NEW YORK (Dow Jones)--Bank of America Corp. (BAC), the largest U.S. bank by assets, plans to charge customers a $5 monthly fee for making debit card purchases starting early next year, according to an internal memo sent to bank executives Thursday.

...

Bank of America is trying to cushion revenue losses it expects to incur from new caps on the fees merchants pay when a customer uses a debit card at their stores. In June, the Federal Reserve Board finalized rules capping such fees at 24 cents per transaction, compared with a current average of 44 cents.

...

Other banks have introduced or are testing new fees in response to the debit fee caps, which stem from a provision known as the Durbin amendment in last year's Dodd-Frank financial regulation overhaul legislation.

This follows many banks ending free checking in large part to the regulations in the Dodd-Frank bill limiting debit overdraft fees. This will likely not be the last time we see banks making more adjustments, either.

Regulations matter. The negative impact of regulatory action when it's not needed only ends up hurting the rest of us in the long run. In a misguided rush by the left to "protect" the population from evil, predatory banks, all you've done is now made it harder for those who you profess to represent and care about the most to use banking services. Congratulations on another job well done.

Comments

[bikinisquad3000.livejournal.com]

Nobody here does either, apparently; feel free to fill us in on why they need it.

[badlydrawnjeff.livejournal.com]

The key point is that they have shareholders to placate. Also, Bank of America ain't doing so hot (http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=BAC), so to kneecap one of their revenue streams seems counterproductive to me.

[bikinisquad3000.livejournal.com]

That's the thing though; losing customers—whether by pricing smaller merchants out of the ability to use their services, or alienating debit card holders who can easily take their money elsewhere—probably wouldn't help their stock go up.

[badlydrawnjeff.livejournal.com]

True. But look at it another way - I don't know how much the average debit customer generates in fees per transaction, but let's say that "average person" does 3 transactions a week, or 12 transactions a month, at 50c/transaction - above the national average. That comes out to $6 a month. Let's be aggressive and say they lose 20% of their debit customers, while the other 80% sticks around and pays the fee. So now you have your average customer paying $7.88/mo in both debit fees and transaction fees, which, if my math is right, is a 24% increase. You think they're making that ground up? Those who are staying with it are effectively subsidizing those who left and then some.

[bikinisquad3000.livejournal.com]

Your math works out, I think, assuming of course the estimates about debit activity and whatnot are in the ballpark. To put it another way, if they lost 24% of their debit activity they'd make the same as they did without the cap and the $5 fee. This formula doesn't account for revenue lost by customers closing their accounts altogether instead of just reducing/eliminating debit card use, or the effect of bad press on their stock prices, but without those factored in they stand to increase their rate of profit quite a bit, so that probably evens out.

So what basic principle does this boil down to, though? To keep the bank from suffering and horrible things happening, they need to not merely profit but make a profit equal or greater to last year's, every year?

[badlydrawnjeff.livejournal.com]

So what basic principle does this boil down to, though? To keep the bank from suffering and horrible things happening, they need to not merely profit but make a profit equal or greater to last year's, every year?

Right now, BoA just needs to make a profit. Thinking in a broader way, though, the basic principle is one of growth. A bank deals primarily with money, so they're looking for continued financial growth - thus, this would appear to be a choice that they're making specifically to continue growing this portion of their business fiscally. Whether this is actually the smarter route will remain to be seen, but I have a feeling the mathematical equation is much more favorable to them than the theoretical example I tossed out there.

[meus-ovatio.livejournal.com]

But sometimes the market won't sustain growth, and when that happens, we shouldn't just turn and knee-jerk our fingers at "the government". The economy is crappy. The market has little growth prospects. And this is the governments fault now, I guess. Or maybe that's just the way it is.

[badlydrawnjeff.livejournal.com]

But sometimes the market won't sustain growth, and when that happens, we shouldn't just turn and knee-jerk our fingers at "the government".

Sure, but when the government is actively impeding growth, we should point the finger.

[montecristo.livejournal.com]

Apparently, you're missing the point he's making: there is nobody here able to do that, anymore than anyone can legitimately say that it won't be needed.

[bikinisquad3000.livejournal.com]

Nope. He says that the reality is that they need to make a certain amount of profit. To put it another way, he is saying that it is a fact that they need to make a certain amount of profit. At the very least he would put this forth as a fact because they said so and he believes them, and at the very most it would be because he knows why. Or he misspoke and "reality" wasn't the word.