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US banks climb down on fees

After regulators prevent them gouging one set of customers, banks struggle to exploit another.

After a backlash from politicians and retail customers, large US banks announced at the start of November that they would drop the monthly fees they had intended to impose on customers using debit cards. Bank of America was the last to fold under pressure and drop the $5 monthly fee it had been testing.

The climb-down is a worrying sign to large banks’ shareholders that it will not be as easy as bank management teams had made out to maintain margins in retail banking at historical levels after regulators forced them to cut card-transaction charges paid by shops and other merchants. It also underlines to customers in other countries the potential dangers from a lack of competition in retail banking.

The fee debate surrounding retail cheque accounts is still raging. Over the past 12 months, banks have started charging for cheques, increasing minimum balances required, charging for cheque accounts, and increasing fees if competitors’ ATMs are used. That now means it costs about $5 to $6 in New York City to make a withdrawal at the ATM of a bank that is not the one where you have an account.

The least wealthy and small businesses are worst hit. Minimum balances of sometimes $1,000 are required to avoid monthly fees, for example. And direct deposits of more than $2,000 a month are required in some instances. That can raise difficulties for small businesses subject to fluctuating payments for their services and products.

Banks introduced the fees because of the Durbin Amendment, which requires that they charge merchants only 12 cents per debit card transaction instead of 44 cents (the interchange fee). In 2010, banks made $50 billion from these fees – with 80% made at the 10 largest banks.

JPMorgan expects a $300 million negative impact on revenues for the fourth quarter this year from the Durbin Amendment. Reports suggest the negative impact for Bank of America will be $475 million a quarter. A glance at third-quarter earnings of the largest banks shows that retail banking and card services are not struggling business lines. It would have been far worse for the bankers had deposits walked out of the door as protesters against the new charges had advocated. These had dubbed November 5 ‘Ditch your bank day’ and encouraged customers to switch away from the large banks.

Community banks might yet find themselves with new customers later this month. The big banks climbed down in the end but not before showing retail customers their true colours.

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