Consumers all over the United States are protesting Bank of America’s new fees for using debit cards. Most Americans are used to using their debit cards everywhere they go, and having free access to their money at all times. Paying even $5 per month seems to rub many people the wrong way. After all, it’s our money, right?
Why is Bank of America (and a handful of other banks) choosing now to alienate their customers? The answers are not complex at all. Every business could use more money. There is the added benefit that placing fees on a debit card encourages consumers to use their credit card instead, which in turn brings more money into the bank. In addition, this and other banks will be soon seeing a hit in a major source of income: swipe fees. In my opinion, recently passed legislation regulating swipe fees is the reason for
While many Americans went about their merry way, a battle was being fought over debit cards this spring: that of swipe fees. As many entrepreneurs are aware, these can be very high, even crippling for many small businesses. Through lobbying and intensive effort, the Dodd-Frank financial overhaul law was passed, limiting the amount of money that banks can charge for debit card usage.
The Federal Reserve will heretofore be responsible for overseeing the way businesses pay for debit cards to be used at their website or location. The new law holds that banks can charge swipe fees that do not exceed 21 cents per purchase, although there may be a possible one cent added on for fraud prevention. This may seem like a lot of money per transaction if you are not familiar with the current swipe fees, which average almost fifty cents per transaction.
This cap has already begun. Market analysts estimated that it would cost $6.6 billion every year from the banking business as a whole. Small business owners and entrepreneurs have long been batted about at the whim of these huge banks. Year after year they raise fees and find sneaky little ways of charging us more for even less services. Their profits are more than the average entrepreneur can even imagine, yet they are always asking for government handouts.
Can you tell that I have little sympathy for the banks? I might feel a little worse for them if they had not already found a way to weasel around this limit on debit card charges. While Bank of America is the institution getting the most press, other large banks such as Chase, Sun Trust and Wells Fargo either plan to follow suit or are already implementing a new fee strategy.
In addition to absorbing the fees that banks are losing with this new legislation, the new fee for debit card usage will encourage customers to use their credit cards. Credit cards are not subject to the same fee regulations as debit cards, which means that banks can still charge sky high fees to merchants who accept them. In addition, credit cards also come with other money making potential, such as interest and fees.
If you are an entrepreneur who relies on debit card purchases, you are probably wondering: what can you do now? Many small business owners were counting on the new debit card cost cap to keep their expenses down and pad the recession-tightened profit margins a little bit. Instead, we are faced with the reality that many customers will be using their credit cards instead to avoid fees, which places us still at the mercy of the banks. However, there are a few ways that you can cut your swipe fees and keep a little more of your hard-earned money in this recession. Here are a few tips. Keep in mind that some may alienate customers, while others may involve intense negotiation with banks, so use at your own risk.
- Negotiate with banks. Most of the swipe fees that you pay are set in stone by Mastercard, Visa and the other major credit card carriers. They are determined by some complicated algorithm that takes into account the size of your business, the amount of money being charged there and more. However, the rest of the swipe fees that you pay are negotiable, and they can really add up! The service fees charged directly by banks can be negotiated down, especially if you have an existing relationship with the bank in question.
- Offer cash discounts. As Bank of America is soon to demonstrate, fees can have the effect of changing customer behavior. You can bet that more people are going to be using their credit cards, inconveniencing themselves immensely just to save $5 every month. This can be bad for your profit margins unless you introduce incentive to use another option: cash. Offering a discount for using cash or a fee for using credit can guide your customers toward behavior that reduces your overhead. Customers may be annoyed by this, but if you educate them about the reasons for this they may be more cooperative and happy to pay in cash.
- Set a minimum purchase. This is a tactic that I see often at a gas station near me. They accept debit and credit cards, but there must be a five dollar minimum purchase. This keeps them from paying a fifty cent fee on a seventy-five cent pack of gum and it and it also encourages patrons to add to their purchases. Does it work? In my case, it seems to. I cannot count how many times I have popped in for a soda and bought several other items just to hit that limit. This practice used to be technically against the rules for many credit card carriers (those rogue minimart owners!) but it is now allowed. Just don’t be too greedy about the amount of the minimum purchase, and be sure you have your policy posted so there are no surprises.
- Raise prices. This should always be the last resort, but it may be one that you must turn to in order to maintain your business through the changes in bank policies. If you decide that this is the only way for your business, be sure to raise prices in a slow and steady manner that won’t attract ire. If there is one thing we can learn from Bank of America, it is that customers get mad when they are suddenly forced to pay more for the same services.
