• Pull the wool over my eyes, please!

    I’m annoyed enough with Bank of America’s new debit card fee that I may switch banks. More on that at the end of this post. But first, Kevin Drum gets the TIE No Nonsense award for explaining the blessing and the curse of the new fees.

    [I]t’s hard to explain why [the new debit card fee] is, nonetheless, a good thing. But here’s the nickel version: the old fees were largely hidden. The new ones aren’t. […]

    So yes: the new fees are annoying. But that’s a feature, not a bug, because now they’re right up front in black and white, which means that consumers will see them and can be properly outraged (or not) by them. This in turn means that the free market has a chance to actually work: consumers will abandon Bank of America if their fees are too high and force them to charge less. Likewise, other banks will compete openly on the size of their fees. In the end, this competition will force fees down to the lowest possible profitable level, which is exactly what competition is supposed to.

    Of course this is correct. A crucial element of a well functioning, competitive market is transparency of prices. By being out in the open, the new debit card fees provide the information consumers need to make informed choices. In economics speak, this should be welfare improving.

    But, it is annoying. I am annoyed. I wasn’t annoyed before, even though I knew there was a hidden swipe tax. That I feel this way  is irrational, but I don’t care. Feelings are feelings, and the irrational, feeling part of me wants things to go back the way they were, even as the economist in me knows things are better now.

    There’s a lesson here for health care. Many policy experts and economists think it’d be far better if people knew the cost of health care, if they were aware what their full, employer-sponsored premiums cost, etc. I agree. Transparency is the right way to go.

    But make no mistake, people will be annoyed. No, that’s not right. A $5/month debit card use fee is annoying. Suddenly learning that your income is lower than it would otherwise be by $10,000 because of your “employer-paid” premium is not annoying. It is enraging.

    What will Americans do when they finally recognize the full cost of health care? If market advocates think they will vote with their feet and find cheaper options, they’re right. I’m sure that will happen. If they think people will be satisfied paying, say $8,000 for health insurance instead of $10,000, I think they’re engaging in some wishful thinking.

    I think many people will be furious at how much of their paychecks are, effectively, being piped into the pockets of health insurers, health care providers, drug manufacturers, health IT gizmo creators, massive radiology machine developers, other device makers, and government programs. Some will think the return is worth the price. Many will not, particularly those who think insurers are wringing them dry.

    What then? I can’t help but think that’s when people turn to government. After the market has adjusted, provided new products with higher deductibles and more managed care (or whatever the latest private-side cost control mechanisms are), people will still not be happy. More of them may then look to political leaders and say, “Do something about this. NOW!!!”

    Transparency is the right way to go. But there’s no telling what market and extra-market fury it might unleash. I’m not making any firm predictions here. My feet are securely planted in the zone of speculation. (I’m entitled to three seconds, right?) I’m just saying we don’t know what passion can do. Be careful what you wish for. (And, for all that, I’m wishing it too.)

    ***

    Now, as for leaving Bank of America, I asked my good friend TFB for some suggestions for online banking, and here’s what he wrote me,

    If you don’t care about interest, Fidelity Cash Management account is a good one. It has no minimum and you get practically everything (free checks, good bill pay). All ATMs in the world are free (ATM fee rebated). Deposit checks by taking a picture of a check.

    My post from 2007: http://thefinancebuff.com/best-checking-account-which-is-not.html

    Fidelity: http://personal.fidelity.com/accounts/aong/fcma_learn.shtml?refpr=CMGTOC002

    If you can live with some limitations on ATMs, Alliant Credit Union pays 1% interest. It doesn’t give ATM rebates but it leverages ATMs of other credit unions and those operated by 3rd parties (e.g. ATMs in 7-11s). Some of those ATMs take deposits. I have one in the cafeteria at my workplace.

    My post: http://thefinancebuff.com/alliant-credit-union-bumpy-ride-to-high-yield.html

    ATM locator: http://www.alliantcreditunion.org/about/atms/

    If you have a separate savings account, the Alliant checking account can serve as both checking and savings since it pays good enough interest.

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    • I think that the argument that consumers are better off is contingent upon the belief that merchants will reduce their prices in accordance with the reductions in fees that they had to pay the banks. That may happen – but it’s just as likely that they’ll pocket the difference, *and* banks will charge additional fees so the net result of this regulation will just as likely be higher net expenses for consumers. Then there’s the additional costs in time and effort associated with cash and check handling.

      Even if costs do move lower, the claim that this regulation is welfare enhancing rests upon the assumption that people only measure “welfare” in terms of money costs – not time, convenience, ease, etc. This is clearly not universally true on a population level, and varies continuously in each individual depending upon their circumstances.

      In all matters of policy, it’s important to distinguish between intentions and outcomes. Well intentioned policies can and do make consumers much worse of (see “Auto Insurance in Massachusetts” for a prime example). The eruption of unintended (though not unforeseen) consequences that negate any of the putative benefits for consumers while trying to regulate something as simple as debit card fees should give anyone who wants to “help” consumers by imposing more bureaucratic price controls on medicine pause. Unfortunately – it’s likely to have the opposite effect.

      Centralized rules will beget more centralized rules to counter the unintended consequences of the first set of rules and…the beatings will continue until the morale improves.

      • I agree that it isn’t likely to have the impact of retailers immediately reducing their prices the day it comes into effect, but the impact will phase in over the course of a year or so as retailers either hold off price rises, or now have the breathing room to reduce prices to compete. Retail pricing is basically driven by profit margins so it seems strange to believe that this law is going to permanently increase retailer’s margins across the board.

        If retailers decide to keep equal pricing for cards and cash, then so be it, but preventing 10-ton gorillas like Visa, Mastercard and Amex from abusing their market power to forbid passing along any fees is pro-competition.

    • I think the swipe fees issue is a perfect example of moral hazard. Aggregate swipe card use increases prices, but individual swipe card use does not, just as aggregate health care overutilization increases premiums but one’s individual use does not. This is why the systems are so dangerous. Given that your behavior won’t change how much things cost for you, why not use that credit card or debit card for the extra convenience in the grocery, or get that extra lab test in the clinic?

      It’s important to get the prices right on things like debit cards (and, to some extent, health care) so that people know what these actions cost. Swipe fees may seem annoying, but the card companies are much more annoying in the past arrangement: everyone faced higher prices even if they didn’t use their card product! talk about annoying….

    • 1. It’s not clear that retailers were actually able to recover the expenses associated with debit card fees. Margin compression seems like an equally plausible outcome given that there are no retailers who thought that competing on the basis of “cash/check only prices” would generate a net increase in business or profits. Lower margins on higher volume still equals higher profits.

      2. The costs associated with cash and check handling are real and greater than zero for retailers, but are more difficult to calculate because they are more disperse (armored cars, labor for till counting and reconciliation at the end of each shift, bounced checks, etc, etc, etc). These costs vary as a percentage of total receipts for each retailer. I suspect that the delta between debit card fees and cash/checks are smaller than people think.

      3. The costs associated with transacting in cash and checks are also non-zero for consumers. This, along with an actual outcome that features no decline in prices and higher bank fees does not look like a welfare maximizing equilibrium for anyone but…banks and retailers.

      4. The extent to which this legislation had its genesis in a deliberate grass-roots effort to promote consumer welfare is vastly overestimated. A legislative rent-seeking battle between retailers and banks (that the banks lost) under the guise of “consumer protection” is a much more credible story (see Corn Ethanol Subsidies and “Green Energy” for rent seeking under the guise of welfare promotion).

      5. The Fidelity Account is good – but took $10K to open when I moved my accounts over in 2007. They also have a visa card with 1.5 rewards (1.5% rate is only good if you want to sent the rewards cash back to a Fidelity account). 2% AMEX also now available. I rarely use the debit card given the rewards – but the fees are competitive. In my personal situation, putting everything on the card and plowing the rewards cash into a Roth is as close to “Welfare Maximizing” as I’m likely to get – but YMMV.

    • did they just say that regulations are needed for the free market to work?!

    • Ah yes, swiping fees vs. anger at banks for instituting debit charges. The great comic Emo Phillips ecumenical prayer; “Dear God please excuse me from the laws of the universe for my convenience.” Small banks under $10 B in assets are not covered, Dick the Dandy couldn’t flim flam everyone.

    • ” Suddenly learning that your income is lower than it would otherwise be by $10,000 because of your “employer-paid” premium is not annoying. It is enraging.”

      I don’t know where you get your paycheck, but I haven’t seen one in several years that didn’t show the “employer contribution” on the stub.

      Now, you can argue that people haven’t been paying attention to available information, but that’s NOT an informational asymmetry, which was the situation for the credit/debit fees. (Hint to BofA: if you need to charge a flat fee that covers the difference for 20+ transactions a month, you’ve just admitted you’ve been gouging retailers.)

      What’s going to be “enraging” is when the Health Coverage goes away and the next paycheck/EOY statement shows that the monies that were previously allocated to my coverage are now being kept in the employer’s pocket(s).

      • Cant say that I have ever seen a paystubb that includes my employers portion of health insurance. I have known and it is shocking that in about 10 years the total cost of coverage and out of pocket for my family has increased from about $3500 to close to $20,000 and with no health issues. This is employee, employer, co-pays, deductibles, etc.

    • The Affordable Care Act (aka “ObamaCare”) requires employers to report the value of the health insurance coverage provided to employees on each annual W-2 starting in 2011. The IRS provided employers time to update payroll systems or procedures to prepare for compliance with the requirement and deferred the reporting requirement for 2011, making it optional. At any rate, transparency in paycheck healthcare cost disclosure is coming soon and the potential benefits far outweigh the potential hissy fits.