Debit fee flop leaves banks seeking $8B in revenue

NEW YORK — Bank of America and its U.S. rivals may struggle to replace the $8 billion in revenue lost because of federal debit-card rules after abandoning plans to extract more fees from customers.

Bank of America said that it wouldn’t charge debit-card users $5 per month, four weeks after the firm’s announcement of the fee sparked a backlash from customers and lawmakers. The lender, which followed JPMorgan Chase and Wells Fargo in dropping plans for such charges, also won’t insert debit fees into checking accounts introduced next year, said Anne Pace, a Bank of America spokeswoman.

Card issuers must seek other ways to replace revenue and trim costs after the Federal Reserve capped fees on debit-card purchases last month at about half the previous level. The limits, mandated by the Dodd-Frank Act, may cut annual revenue by $8 billion at the biggest U.S. banks, according to data compiled by Bloomberg Government.

“They won’t be able to get it all back because the strategy they were moving toward was a flop,” said Bart Narter, a senior banking analyst at consulting firm Celent. “They might start to require higher balances, or direct deposits from your paycheck, and they’ll try to change consumer behavior to make them less expensive to serve.”

The retrenchment was the latest blow to the U.S. banking industry, which was also hit by regulations limiting overdraft charges and stricter international rules on capital levels. The 24-company KBW Bank Index has fallen 27 percent this year, led by Bank of America’s 52 percent plunge.

The lender, the second-biggest in the U.S. by assets, could lose about $2 billion in annual revenue because of the debit rules, executives said in July. The Charlotte, N.C.- based bank planned on recovering some of that by converting customers to new checking accounts and constraining interest rates paid on deposits, Chief Executive Officer Brian Moynihan said at the time.

“We will continue to initiate actions to mitigate lost revenue where and whenever possible,” Pace said yesterday in an interview. “Our strategy remains consistent in that we will reward customers who do more business with us.”

Lenders will “find more subtle ways to make up for this lost revenue, increases that may fly under the radar,” said Bill Hardekopf, CEO of Birmingham, Ala.-based research firm LowCards.com. “Banks may increase existing fees or raise the introductory interest rates on credit cards.”

The firms could also lean more heavily on the practice known as cross-selling, or marketing services to existing customers, said Jason Goldberg, a Barclays Capital analyst.

Bank of America may have erred in the way it introduced the new charge, Goldberg said. While JPMorgan and Wells Fargo were testing smaller fees in some markets, Bank of America said that most customers who didn’t have $20,000 in total balances or a mortgage or a brokerage account would face the new costs.

The lender timed its Sept. 29 announcement to make it clear to the public that it was a result of federal rules taking effect in October, said a person with direct knowledge of the bank’s planning. The industry has pointed to Sen. Dick Durbin, the Illinois Democrat whose legislation reduced so-called swipe fees, as the reason for the new charges. The lawmaker has said banks still “profit handsomely” from debit transactions.

Bank of America cited Wells Fargo, JPMorgan, SunTrust and Regions in an internal memo to staff justifying its new fees.

“Like many other banks across the industry, we are choosing to charge a fee so we can continue to provide a payment vehicle that offers convenience, control, security and utility,” the company said in the September letter.

Last week, Bank of America executives considered adding ways for customers to avoid the fee, including setting up direct deposits or using credit cards, said another person with knowledge of the lender’s plans. The company dropped the fee entirely after it became clear it was the only national bank that still planned to assess it, the person said.

Citigroup and U.S. Bancorp had already rejected imposing new charges, and SunTrust Banks and Regions Financial eliminated check-card fees earlier this week.

Moynihan, 52, had defended Bank of America’s plans, saying Oct. 18 that the debit-card fee would encourage customers to use more services with the company to avoid the levy. He has also emphasized the convenience and safety of using the lender’s debit cards — an argument that may not have swayed consumers, said Narter of Celent.

“The customer’s perception was that the valid cost of providing debit cards is zero,” Narter said. “Once you’ve had it for free, you don’t want to pay.”