This week news broke that starting October14th, Wells Fargo will be piloting a new debit card fee in certainstates. The $3.00 fee will be charged to debit cardholders whouse their card at the POS, regardless of authorization type.Cardholders who use their card for ATM transactions only will notbe subject to the fee. A similar fee structure is also being testedby Chase and SunTrust, charging $3.00 and $5.00 respectively, toconsumers who use their debit card for purchases.
Subsequently, Well Fargo is taking a lot of heat from the press,who have grabbed the issue and run with it. The press play goessomething like this: What! A bank charges me to use my own debitcard? Are you kidding? Well of course, that’s because the banksused to charge merchants these fees and since the financial reformlegislation went into effect and they can’t do that anymore, theyhave to get that money somewhere, so they’re charging consumers.Like a game of Telephone gone wild, the entire history of the debitcard industry is shrunk down into sound bites.
Yet within all the noise, there is a lesson as well. Clearly, thereare many consumers who love their debit cards and use them often.They view these cards as a safe, effective, and convenient means ofaccessing their everyday money. At the same time, consumers arestill very uncertain about using new payment forms, such as mobile.Merchants want to see real adoption trends before they’ll commit toemerging payment schemes, and the market should remain in this”chicken and egg” state for at least a few more years. Within thisvolatile and evolving landscape, what happens if more issuersattach explicit fees to debit cards, rather than to checkingaccounts? Let’s consider two possible outcomes.
On one hand, this fee structure draws attention to the card, yetcommunicates no underlying value other than its ability to be usedto pay for items at the POS. In other words, it runs the risk ofcommoditizing the product and reducing it to its least commondenominator. Further, it could spark an eventual price war if moreissuers embrace this structure, consumers begin to shop for cards,and price compression sets in. On the other hand, by establishing afee for the product used to access funds, (rather than a fee forthe funding account and giving the card away for “free”) issuerscould end up with a more viable long-term economic model. Thiswould be a model that provides the revenue stability required toinvest in getting other forms of payment products into the market(like mobile, online, contactless, or e-wallets) which can operateindependent of the funding source.
This is a tricky balancing problem, since any emerging productneeds to be ready to step in as viable replacement for the legacyproduct as soon as its decline begins in earnest. Without thatattention to timing, a race to the bottom accelerates and itbecomes more difficult to climb out of the hole.
As any debit issuer will tell you these days, there’s just no easyanswer to the question of revenue recovery and growing a market. Ithas to be done, but breaking new ground is painful – foreveryone.
