Nickel and dimed

When Bank of America announced recently it would begin charging most of its customers a $5 monthly fee for using their debit cards, banks everywhere saw opportunity.A cashier swipes a debit card at Shakespeare’s Pizza in Columbia.

“Let’s just put it this way: When the news went out about Bank of America, our call center lit up,” said Mary Wilkerson, Boone County National Bank’s director of marketing. “Switching a bank account can be cumbersome, so you’ve got to be pretty mad to go to all that trouble.”

That’s just one example of how new rules capping the fees big banks can charge merchants when a customer swipes a debit card are shaking up markets across the country. Largely unnoticed by consumers, businesses that take payment via debit card are charged a fee by the bank that issued it. New rules, which took effect Oct. 1, cap the fees big banks can charge merchants at 21 cents, plus a few more pennies for some fraud-prevention costs. That’s nearly half the industry average of 44 cents per swipe that banks charged businesses before.

“Twenty cents doesn’t seem like a lot, but you multiply that by millions, and it’s a lot of money,” said Bill Ratliff of the Missouri Bankers Association.

As a result, large institutions such as Bank of America and Regions Financial Corp. announced they planned new monthly debit card fees to offset the nearly $7 billion the industry says it will lose because of the new regulations. Large retail chains, which fought a long lobbying battle with the banks over the rules created by the Dodd-Frank financial reform law passed last year, expect a boost to their revenue stream, and smaller merchants hope to see lower costs as well.

And although the rules were written to only affect banks with $10 billion or more in assets, local community banks say that eventually they will have to lower the debit fees they charge merchants to stay competitive.

“If Wal-Mart cuts off our cards, we’ll be adjusting our rates,” said Dave Putnam, First State Community Bank’s Columbia president. “We can’t have our customers not being able to use our cards.”

As debit card use has soared over the past several years, the banking industry has seen merchant swipe fees rise to more than $20 billion, the Wall Street Journal reported. That’s up from about $11 billion in 2006. The merchant fees associated with debit card use gave banks a hefty revenue stream to offset the costs of checking accounts, and banks big and small have cashed in.

“It has become an increasingly larger portion of our income because of the increasing acceptance and use of debit cards,” Putnam said. “That’s really what has allowed us to offer free checking.”

The rules were added into the Dodd-Frank bill by Illinois Democratic Sen. Dick Durbin. Proponents of the measure argued that the merchant charges were well above the banks’ costs to provide the service. But the banks fought the rules with some success. The rules originally were scheduled to take effect this summer and cap fees at 12 cents per swipe, but the Federal Reserve, in charge of writing the regulations, raised the cap to 21 cents and pushed back the start date.

Still, banks aren’t happy about the new rules. Commerce Bank, which is large enough to be affected immediately, will lose about 50 percent of the revenue associated with its debit cards and will have to make up for it somewhere, said Chief Financial Officer Charles Kim.

In the second quarter of 2011, Commerce Bank’s holding company, Commerce Bancshares Inc., reported $15.7 million in revenue from all debit card fees in its quarterly filing with the Securities and Exchange Commission. It anticipated the new rules would shave $7 million off debit card revenue in the last quarter of 2011.

“Typically, when the government gets involved in setting prices, it’s not a very productive situation,” Kim said. “This particular fee and the amendment to the Dodd-Frank Act has nothing to do with subprime lending; it has nothing to do with the financial crisis at all. It’s just retailers taking advantage of the fact that the banks were down and no one in Washington was thinking very favorably of them.”

Commerce Bank has no plans for a new debit card fee charged to account holders, and it is still evaluating how to cut costs and find other sources of revenue, Kim said. But Kim said the rules have put the bank “under a lot of pressure,” and it, like the rest of the industry, will be re-evaluating services that customers have become accustomed to getting for free.

“There is no question that the economics of the free checking account that you saw in the late ’90s and the last decade, those economics are dramatically changed,” he said. “And it’s unlikely that accounts will be free the same way that they were there for a number of years.”

Whether consumers will look to dodge any new fees associated with debit and checking services is up in the air. Ratliff referenced an American Bankers Association survey from this summer that found 71 percent of bank customers avoid any sort of account fees at all.

Tengda Chin, a University of Missouri student and a Bank of America customer for three years, said he plans to try to avoid the planned $5 monthly fee by not using his debit card for purchases. But the benefits of banking with a large national chain will keep him with the bank.

“I don’t want to switch banks because” Bank of America “has the most ATMs in the country,” Chin said. “If I switch to a local bank here, that’s a lot of inconvenience.”

In the short term, smaller banks hope to pick up a few customers disgruntled with new fees. While Boone County National Bank sees an opportunity with the new rules, Wilkerson said that eventually it, too, might have to change its account fee structure if it is forced to lower its fees to par with big banks.

“While we can be excited about the fact that these big guys are charging fees, we can’t get too excited about it because we don’t know what’s in our future,” she said.

First State Community Bank plans to keep its fees down as long as possible and try to pick up market share, Putnam said. But he estimated that small banks could begin to see pressure to lower their debit card fees within 12 to 18 months, and that will make them look for other ways to make up for that money.

“I’m hoping we don’t get to that point where community banks aren’t able to offer free or reduced checking accounts for consumers with smaller balances, but it might get to that point,” he said.

For their part, merchants aren’t even sure whether they will see the intended benefit. Jackie Maxwell, the general manager of MFA Oil’s Break Time convenience store chain, said in an email that other fees associated with cards have already started rising. Fees paid to banks and credit card companies for payment processing cost the chain almost as much as the salaries of its hourly sales clerks, she said.

If new bank fees change consumer behavior more to credit or cash payment, it could be harder to predict the effect on retailers. But Maxwell said Break Time is expecting some savings from the new card rules. For instance, she wrote, a $1 cup of coffee purchased with a debit card costs the store 35 cents in fees, which sometimes results in a net loss on the transaction.

In gasoline sales, where margins are lower for retailers, companies are already making pump equipment with two pricing screens — one for cash and one for credit, Maxwell said.

“If” Mastercard “and Visa raise their costs significantly as a result of the loss in debit card revenue, it would be more likely that customers will see two-tiered pricing in the marketplace,” she wrote.

Smaller merchants are happy with the rules change, but Osama Yanis, who owns the Coffee Zone on Ninth Street, said the main beneficiaries will be big chains such as Wal-Mart and McDonald’s.

“It may make a difference, a little difference,” he said. “It depends on what bank” customers “route their money to.”

Harry Patel, a co-owner of Eagle Liquor on Business Loop 70 and Columbia Liquor on Providence Road, said he pays $700 to $800 a month in debit and credit card fees. In 2006 and 2007, he was paying around $500 to $600 a month in such fees. The new debit card fees still are too high, he said, because banks are just taking money directly from a customer’s bank account rather than advancing the money like a credit card. “You’re not taking any risk on debit cards,” Patel said.

Although the debit rule change might help, it’s the credit card fees that are highest and hit his business the hardest. That’s the form of payment his customers are increasingly using, and he expects fees for credit card processing to go up soon.

“It’s become one of the highest costs a retailer has to deal with — credit card processing,” said David Overfelt, president of the Missouri Retailers Association. “Consumers think they aren’t paying for it. Yeah, they are paying for it.”

Although Overfelt pushed for the debit rules along with other retailing associations, he thinks the money that was flowing to the banks will just be made up somewhere else.

“These are major profit centers,” Overfelt said. “And it’s a major profit center the public’s going to pay for one way or another.”