Banks Hope Credit Card Usage Continues Due to New Debit Card Fees

October 5, 2011, Written By Lynn Oldshue
Banks Hope Credit Card Usage Continues Due to New Debit Card Fees

Consumers are outraged that banks are now charging monthly fees if they use their debit cards.

Regions and SunTrust have already levied this monthly fee; Bank of America will begin charging a fee in 2012; and Chase (one state) and Wells Fargo (five states) are testing this fee in various areas. The common explanation from banks is that they are losing billions of dollars in revenue from the Durbin Amendment which basically cut the interchange fee on debit card transactions in half. Banks feel they need to make up for this loss of revenue, and charging customers to use their debit card is one way to generate revenue.

But could there be another reason for a monthly charge on debit cards? Are banks trying to indirectly force consumers to use credit cards because credit cards are much more profitable to these financial institutions?

If consumers choose to now go without a debit card in order to avoid these monthly fees, consumers will turn to other forms of payment, and credit card usage could increase dramatically. That would be great news for banks because credit cards are a much greater profit center for two reasons.

First, credit cards are not covered under the interchange fee regulations that went into effect on October 1. These regulations only affected debit card purchases. While the interchange fee varies depending upon the volume of the retail outlet, retailers still have to pay the banks approximately 2% of any credit card transaction, including tax. This is much higher than the amount a bank is paid for a debit card transaction. So banks want you to use a credit card when you make your purchases.

Secondly, banks will make a significant amount of money if you use your credit card and don’t pay off the entire balance on time each month. Consumers are charged a hefty interest rate for carrying a balance from one month to the next, and that interest payment could be anywhere from 10% to 29% depending on your credit card’s APR.

To further trigger this credit card usage, issuers are providing more incentive to consumers with attractive rewards on credit card usage.

Credit card rewards have strongly rebounded in 2011. According to Mintel Compermedia, eight in ten credit card offers are for rewards cards promoting points, miles or cash rebates, up from six in ten offers in 2008. Cash back bonuses are generous–the Chase Freedom card offers a $200 cash back bonus for new customers; and the new Capital One Cash card gives a 50% cash back bonus on the cash rebates you earn each year, plus a one-time $100 bonus. Airline rewards are also plentiful–an example would be the Southwest Airlines Rapid Rewards card gives 25,000 bonus points after the first purchase.

The bottom line: banks want you to reach into your wallet or purse for a credit card to make the payment since it means more profit to the bank.

If you switch to credit cards for payments, pay off your balance in its entirety on time each month. Otherwise, the interest payments could become overwhelming and are sure
to be greater than any new debit card fee.

This entry was posted in Credit Card News and tagged No tags added

The information contained within this article was accurate as of October 5, 2011. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.

About Lynn Oldshue

Lynn Oldshue has written personal finance stories for for twelve years. She majored in public relations at Mississippi State University.
View all posts by Lynn Oldshue