After an intense public backlash, Bank of America and other banks have backed off charging monthly debit card fees.
It's a victory for angry customers and consumer advocates. But the move will be costly for banks. They are scrambling for ideas on how to make up for lost revenue at a time when interest rates are at rock bottom and there's little demand for loans, the traditional source of making profits for banks.
Banks are likely to avoid jacking up existing fees or introducing other new ones for fear of stoking more public anger. Most large banks have already gotten rid of free checking this year and increased monthly fees by an average of $10 for checking accounts. They also charge $2 and $3 for services like printed statements and canceled checks.
The $5 monthly debit card fee Bank of America Corp. announced on Sept. 29 became a flashpoint of anger for "Occupy" protesters nationwide. There is also a growing movement among consumers to transfer accounts from big banks to credit unions and smaller community banks.
Customers moved at least $4.5 billion to credit unions in the last four weeks. At least 650,000 customers joined credit unions since Sept. 29, when Bank of America announced its fee, according to Credit Union National Association, an advocacy group for 7,400 credit unions.
After seeing the public reaction, JP Morgan Chase & Co., Wells Fargo & Co., SunTrust Banks Inc., and Regions Financial Corp. all backed down from plans to charge monthly fees for debit card purchases. Bank of America was the last major bank to backtrack on its plans when it scrapped its fees on Tuesday.
"Consumers have the power to make the big banks back down from unfair practices if they raise their voices and vote with their feet and their dollars," said Norma Garcia, manager of Consumers Union's financial services program.
For the banks, it will be an expensive decision.
The debit card fee was triggered by a new federal law championed by Senator Dick Durbin of Illinois, which goes into effect on Oct 1. The law caps the amount banks can charge merchants for debit card usage at about 24 cents per transaction, down from an average of 44 cents. It will whittle down revenue dramatically for banks.
Banks have given estimates of how much they would lose in the last three months of this year alone:
_ Bank of America said it will lead to a reduction in revenue of $475 million
_ JPMorgan warned it would lose $300 million
_ Wells Fargo said it would lose $250 million
_ PNC Financial Services Corp. will take a $75 million hit
_ SunTrust's will decline by $45 to $50 million
Moshe Orenbuch, bank analyst at Credit Suisse, says the Durbin regulation will cost about $5 billion overall for the banking industry. Other analysts have pegged the losses as high as $10 billion. Orenbuch says he expects banks to be able to recoup only a modest portion of lost revenues in 2012.
Most banks say they expect to make up for the lost revenue by next year, but none of them have given specific plans. Revenue and income at banks have already shrunk dramatically this year because interest rates are so low and demand for loans is anemic.
"There is no silver bullet," says Sherief Meleis, a partner at bank consultant Novantas. Meleis says any bank that raises prices will not just see public pressure, but will face intense competition. He points to the credit unions and community banks that stepped up their advertising and marketing after Bank of America announced its $5 monthly debit card fee.
Meleis says banks will have to rely on an incremental, but multi-pronged strategy like cutting costs by reducing the number of branches and also slashing staff at branches. Another strategy would be to generate more business per customer by offering incentives to those that bring in higher-margin transactions like credit cards and mortgages along with their checking accounts.
Some of this is already bearing out. This year, Bank of America is in the process of closing down 10 percent of its branches and is cutting staff by 30,000. Last month, JPMorgan said it would reduce its branch expansion partly because of the reduction in revenue from debit card fees.
FBR Capital Markets bank analyst Paul Miller says banks aren't going to make it attractive for customers who keep low balances because it costs the banks too much to keep them.
"Unfortunately, the marginal customer will be pushed out the door," said Miller.