A while back we wrote about an article in the NY times titled , “The Card Game: Overspending on Debit Cards is a Boon for Banks.” A lot has changed since then but a lot has also stayed the same. Debit cards are cementing themselves as a new profit center for major financial institutions.
So here we are, you and I, getting out of debt, trying to do the right thing, we save and move money into term deposits we start learning about investing and we make the switch to prepaid debit cards and shun our once always reached for credit cards. All is right with the world of personal finance. Heck even new financial regulations as part of the 2010 Dodd-Frank Financial reform law have our backs, or at least part of them (maybe the left upper shoulder). A big loophole allows banks to charge merchants relatively high fees for processing payments made with this type of debit card.
Since a prepaid debit loaded with funds from our deposit accounts card usually cannot be overdrawn you and I have been labeled as low profit customers and that means we have a big target on our heads. An article from the Chicago Tribune helps explain the banks reasoning for the switch:
Many banks are going the same route as JPMorgan Chase and moving unprofitable customers into prepaid debit cards. The product generates fees – it will cost consumer $4.95 a month, for example – and also cuts down on the cost of maintaining the account, said Todd Maclin, who heads Chase’s consumer and business banking unit.
“When we get out of the overdraft business, we also get out of the check business, which means we get out of the paper business, which means we also get out of a lot of processing, which means we save a lot of money,” Maclin said.
So have we switched from one free generation product (credit cards) to another (prepaid debit). Grrr! Most banks make more money on bank fees than they do on credit card interest, recently totaling $27 billion in fees this year v.s $20 billion from credit, and it appears they are doing everything they can to keep that number high. Of course the banks are arguing that if regulations are put on these practices they will have to distribute the expenses other ways, such as eliminating free checking accounts.
So here’s the deal: A large step in the right direction but still something to watch out for. I am not against fees for services, this is how the world works. What irks me the most is when regular folks feel they are doing the right thing, especially if they are struggling and trying to be smart, but they end up just going down a different path to a similar destination, however I certainly realize that small fixed monthly fees are better than the high dangers of credit card debt.