Will BofA Debit Fee Help Fight Fraud?Banks Can Leverage Debit Fee Cuts to Enhance Fraud Prevention
The announcement isn't surprising. Many other banking institutions are expected to soon follow suit, as the debit interchange cut mandated by the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act begins pinching institutions' revenue.
According to the Nilson Report, U.S. banks and credit unions in 2009 brought in $19 billion from debit interchange fees. Now they have to figure out a way to make up that lost revenue.
By charging a fee for debit use, banks and credit unions could make up the difference in lost debit income and enhance their debit security.
For BofA, the new monthly debit fee will only apply to basic accounts. And customers will only be charged if they use their debit cards for purchases. ATM transactions are exempt.
BofA did not say what it expects to do with the $5 fees it collects, though I hope some of that income will be allocated to debit-fraud prevention. Doing so only makes sense, since fraud prevention is the only bone the Federal Reserve could really toss the banking community's way to help lessen the blow of Durbin. [See The Fed's Impact on Fraud Funding.]
Durbin's impact on debit interchange has been highly criticized by the banking community, and it's been vigorously supported by the retail sector. No one knows what the long-term effects of the legislation will be, but banking institutions are not delaying their moves to compensate for the lost income - an argument those opposed to the legislation have used to support their view that the interchange fee reduction will ultimately hurt consumers.
On Oct. 1, the Fed begins cutting fees banks and credit unions collect from merchants for debit purchases. But the Fed is offering an interchange bonus, if you will, for investments tied to debit-fraud prevention. Banks and credit unions can get a 1-cent per transaction incentive for investments in "new and improved" fraud prevention solutions. Ultimately, they could receive 24 cents per transaction, up from the 12-cent cap originally proposed in Durbin. [See Debit Fraud and Interchange.]
So, by charging a fee for debit use, as BofA soon will, and then taking some of that income and applying it to fraud prevention, banks and credit unions could make up the difference in lost debit income and enhance their debit security. It could be just the incentive they need to seriously consider making strategic moves toward chip and PIN technology, such as EMV - the Europay, MasterCard, Visa standard.
The Fed won't mandate a move to EMV, but banking institutions now have motivation to make a shift, without regulatory pressures.
In the end, this could all be a win for the banks. But I wonder how well-received the news will be on the consumer end. Will consumers appreciate the strides banks make to improve debit security, or will they just resent the increasing fees banks keep tacking on for service?