12/27/2012 08:19 pm ET Updated Feb 26, 2013

Bank of America's Backtrack on Fees Is Proof Debit Reform Is Working

Bank of America's recent decision to back down on new checking fees next year is further proof debit card swipe fee reform has resulted in greater marketplace competition benefitting consumers.

It also demonstrates that bank charges to customers have nothing to do with bank charges to merchants, despite the banking industry's repeated assertion that debit reform -- also known as the Durbin Amendment -- is to blame for recent hikes in checking, overdraft and other customers' fees by some banks.

Wisely, Bank of America is searching for other ways to make more money through new offerings, like mobile banking, and other services for higher-income customers. Listen to its CEO Brian Moynihan during a recent CNBC interview:

"So, a lot of the fee stuff that we talked about for years is overdraft fees and the interchange (swipe) fees, and even the Card Act ... that's been out of our P&L for over a year. So literally, quarter by quarter, the fees are stable and growing. One of the areas we've invested a lot is mobile banking. And why mobile banking? It's because what that allows the customer to do is have a much more intimate relationship with us in much more real time."

Suddenly, the CEO of one of the largest U.S. banks is talking about developing a warm and fuzzy relationship with his customers, instead of blaming fee hikes on Congress. This from the bank that drew consumer outrage when it tried to force a $5 fee on debit cards in 2011.

Could it be this change of attitude results, in part, from debit reform providing a more level playing field where smaller banks and credit unions can compete with the nation's largest banks? Debit reform limited the amount of fees that the largest 100 banks could charge through centralized price-setting and pushed them to compete on price instead.

In 2011, during the height of the debate prior to passage of debit reform, BofA said they had considered higher fees on checking, overdraft and debit card use in the past but had never figured out how to "message" it to customers. In other words, the bank couldn't blame anyone else for fee hikes. Debit reform became a scapegoat, until the marketplace proved otherwise and made it clear bank fees have nothing to do with debit reform and consumers are reaping the benefits in lower prices and improved services.

Consider these findings: Data compiled by and uncovered a much different story. Big banks -- the only banks impacted by debit reform -- have not raised their checking fees as much as small-sized banks that were exempted from the reductions in debit card swipe fees. So this means the banks making less from debit card use have been less likely to increase their checking fees as the banks making more from debit cards. What's going on?

The truth is, checking fees are set by competitive market dynamics, while swipe fees on debit cards haven't been. The fees were decided by Visa and MasterCard and every bank that belonged to one or the other charged the same thing - that looks just like price-fixing in every other part of the economy. The fact that swipe fees tripled over the past decade didn't prevent banks from increasing checking fees at the same time. Fluctuations in checking fees and other banking fees since debit reform are fundamentally the same as what was happening in the consumer banking market before the reforms were enacted with checking fees going up at the same or a lesser rate.

The bottom line is banks save money when their customers use debit cards. That's why banks came up with debit in the first place. The cards save the banks from handling paper checks or having tellers handle withdrawal slips. Those methods are much more expensive for banks than debit cards. And, according to the Federal Reserve's own survey data, it costs banks an average of $0.04 to process a debit transaction. After debit swipe reform, big banks could still charge merchants more than $0.21 per transaction. On top of these fees are the astronomical amounts of profits from credit card swipe fees that have not decreased. Americans paid around $60 billion in credit and debit card swipe fees in 2011, dwarfing every other fee banks charge -- including late fees, overdraft fees, ATM fees and the like.

Do the math. Any way you slice it, that is still a significant profit for banks.

BofA's decision will likely drive other banks to follow its lead. An analyst with The wrote: "Bank of America's decision to back away from fee increases for many of its customers is likely to persuade competitors to take similar steps if history is any guide."

And, that can only be good news for consumers.