Another Non-solution for Economic Recovery

Look who’s in the news again: Bank of America. The troubled company, which is the largest bank in the country by measure of deposits but still needed a bailout from Warren Buffett earlier this quarter, announced today it would begin charging a $5 monthly fee to its customers for using their debit cards.

That’s right. It’ll now cost BofA customers $5 a month for the privilege of spending their own money.

The economic reach of this plan is far. For years, credit card companies have been encouraging consumers to use debit cards. It speeds up the line, because you don’t have to take the time to write a check; you just swipe your card. It’s easy to pay bills online. Debit cards have become an intricate part of the fabric of the American economy, perhaps even the American way of life.

At the retail level, card companies charge retailers fees to accept their credit and debit cards. To encourage retailers to have customers use debit instead of credit cards, the fees are lower for debit cards.

So, if everyone stops using debit cards and uses credit cards instead to avoid the monthly fee, retailers will make less of a profit on the goods they sell, which will hamper overall economic growth.

Furthermore, one of the inhibitors of economic recovery is a lack of consumer spending, and that’s partially due to the fact that many, many Americans have a lot of credit card debt to pay off. So using a credit card instead to avoid the debit card transaction fee uiltimately slows the rate at which credit cards can be paid off, which slows the rate at which Americans will be willing to make large purchases, which further hinders economic recovery.

And using paper checks to get around all this, increases worker hours banks must use to process them, which leads to less efficiency, lower profits, and likely more fees like this that depress the economy. Plus, paper checks are worse for the environment than resuable debit cards.

And all this comes from a company that announced earlier this year that it would be helping to slow the recovery by laying off as many as 100,000 employees by year’s end.

As easy as it is to throw stones at BofA for continuing to run their business in such a way that it’s a drag on the economy, they are not alone in this debit card fee scheme. Chase and Wells Fargo have begun experimenting with $3 debit card transaction fees in select markets.

Why would banks be doing this? Simple: they want you to use your credit card, because the government regulations set to take effect October 1 cap the fees banks can charge retailers for accepting debit cards. There is no such restriction on credit card fees. Thus, the banks are working very hard to encourage you to use your credit card.

So with the economy remaining stubbornly sluggish, the bank plan to alleviate the situation is to raise fees on consumers and retailers, which will raise the cost of doing business, which will likely lead to a rise a in retail prices, which will in turn further depress consumer spending while simultaneously make it harder for people to get out of debt and therefore reduce their spending even further.

So much for private industry being the solution for economic recovery.

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