While the positive effects of the financial laws passed over the course of the last few years have indeed been many, these new regulations have also served to limit financial institutions’ means for making money. For example, debit card interchange fees have been capped at about 24 cents per transaction, credit card companies can no longer raise interest rates on existing credit card balances unless delinquency reaches 60 days, banks can’t charge overdraft fees unless accountholders agree to opt-in for the ability to overdraw their accounts, and people under the age of 21 can’t open credit cards without either a co-signer or the assets and income required to cover minimum payments.
From the time these laws were first proposed, people have been wondering how banks would recoup their losses, and to a certain extent, these questions have been answered. Having already lost much of the $25-38 billion they once charged in overdraft fees and now facing what Card Hub estimates to be $9.4 billion in lost interchange fee revenue, major banks like Wells Fargo, Chase, SunTrust and Regions are adding fees to checking accounts and are gearing up for a push to prepaid cards. Most banks have also stopped offering unsecured credit cards for bad credit in light of credit card fee restrictions.
As a result, you have to wonder: Why are we seeing checking account fees now when we didn’t witness a rise in credit card membership fees after the CARD Act took effect in February 2010.
In a logistical sense, we are now seeing new checking account fees popping up because the Federal-Reserve-mandated cap on debit card interchange fees is set to take effect October 1 and banks are simply gearing up for the change.
The reason that fees were not added to credit card accounts prior to or shortly after the CARD Act’s implementation is more fundamental, however. While checking account fees are the only significant means of recouping lost revenue that banks have, credit card companies have other tools at their disposal with which to confront the changing personal finance landscape.
Credit card companies needn’t introduce membership fees, as they can simply raise interest rates, both for new customers and those who are late with their payments. In fact, they would prefer to recoup losses in this manner, as any charge would be in proportion to a customer’s debt, rather than being indiscriminately applied to everyone’s accounts. A person who owes $10,000 on a credit card represents a greater risk than a person who owes $1,000, after all, so would it be fair for both of these customers to get the same cost increase? No, of course not.
So while the fear mongers’ assessment that no annual fee credit cards would become a thing of the past wasn’t based in fact, they are unfortunately correct when it comes to the impending eclipse of free checking accounts.
[Disclosure: Some of the links within this article point to Card Hub, which is owned by the same parent company as Wallet Blog.]