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Debit For Debit

David Lazarus argues today in the Los Angeles Times that Bank of America has found a way to make money off Dodd-Frank. The financial reform bill directed the Fed to limit the "swipe fees" banks were charging merchants for the use of debit cards in retail transactions. Reform was needed because these swipe fees were about the same for debit and credit cards, which made no sense. With a credit card you're borrowing money, but with a debit card you're supposed to be spending only money that you have. The Fed initially knocked down debit swipe fees from 56 cents per transaction to about 12 cents; after much pissing and moaning from the banks the Fed raised that to 24 cents. Bank of America says this will cost it $2 billion annually, according to Lazarus.

B of A now says it's going to charge you $5 per month to use your debit card (by which it means the kind of debit card you use to buy stuff, not the kind you use to get money out of an ATM, though the distinction is largely theoretical since today nearly all debit cards are "hybrids" that allow you to do both). Lazarus calculates, plausibly, that B of A will make $3 billion per year from the new fees. But B of A only said it stood to lose $2 billion per year from the higher swipe fees. So the dead hand of Washington regulation will net B of A an additional $1 billion in revenues.

Lazaarus quotes a B of A spokeswoman saying that the swipe fees weren't exorbitant because the bank had to cover "such services as fraud and overdraft protection." Fraud protection I'll buy. But overdraft protection? Stop and think about that. Why do you need overdraft protection for a debit card? Isn't the whole point of a debit card that you can't spend money you don't have?

Well, yes and no. When the debit card first appeared banks were terrified that people would stop spending money they didn't have, as they did with credit cards. People spending money they didn't have was good for banks (provided a reasonable percentage of those people eventually paid the money back with interest). People spending only money they did have was bad for banks. So the banks quietly made debit cards resemble credit cards as much as they possibly could. One of the ways they did this was by structuring purchases with retail (or "offline") debit cards so that the money took a few days to get sucked out of your account. This made overdrafts possible, and therefore made it possible for debit-card users to incur overdraft fees. In the larger scheme, it made debit-card users do what banks want all their customers to do: spend money they don't have.

I've written at greater length about the evolution of credit cards, debit cards, and swipe-fee limits here. The larger point is that B of A now plans to charge people even more than they did before to spend their own money. Maybe they'll piss debit customers off so much that they'll go back to their credit cards. Which would suit B of A just fine.