Blog

Bank of America Debit Card Fee: A Loss of Perspective

October 31st, 2011

Strategy

When I opened my first bank account I remember choosing the bank because of convenience. It was right around the corner, had Saturday hours, and stayed open late one night a week. It was an era before ATMs, before the internet.

The recent furor over Bank of America’s new debit card transaction fee reminded me both of how far we have come and of how easy it is for corporations to lose track of the customer’s perspective. You see, when I opened that bank account in 1978, banking was a labor intensive industry. Paper and people carried the load and huge mainframes kept record. But all that changed with the advent of ATMs. We entered a new era with new rules. ATMs reduced the importance of tellers since customers could now access their cash at any hour almost anywhere. ATMs provided more convenience and control, with a lot less sumptuous surroundings, and in exchange, banks could automate transactions and lower costs. No more tellers, no more extraneous paper.

The new principle that governed the relationship of customer to bank was something that I call transaction cost displacement – I do the work and you provide me with convenience and control – a win-win proposition. Understanding this simple principle helps explain the outrage created by Bank of America’s move to the new debit card transaction fee.

But maybe it wasn’t so simple. Maybe there was a new principle at work. Maybe ATMs led to ubiquitous debit cards and that led to new opportunities. Opportunities for banks to develop creative ways to generate new revenue streams and new marketing agreements. And maybe, in the end, debit cards were a very profitable venture. After all, it’s only natural for banks to try to optimize all the possible revenue streams.

Then along came Congress. Bristling in the aftermath of the 2008 financial meltdown and aided by a healthy dose of encouragement from retailers, they took a look into those revenue streams and decided to regulate the market. They said, let’s set the rate for the underlying transaction. No more back door agreements. You can only charge vendors so much for them to directly interact with your information systems. Gone were the padded charges to vendors and the cross-sell opportunities and other systems that made you so much profit.

So what were the banks to do? Charge a fee to recoup their lost revenue, of course. And that made sense, except for one thing: the rules. Bank of America violated the underlying common sense principle that consumers had accepted. They forgot that with new medium come new rules and if you want to change the rules you had better understand them first. The original unwritten agreement may have fallen by the wayside a long time ago, the exchange of tellers for convenience, but to the customer, there was ever more evidence that transactions should be free and the only thing you should have to pay for are value-added services. So, by charging a fee, Bank of America has become a cause célèbre. To the consumer, it’s unfair. It breaks the fundamental contract that we all agreed to once upon a time when tellers and paper ruled the land.

What makes this so important? With every new technology, a new contract is written; a contract that governs the user experience, one that is neither explicit nor easy to understand. Yet understanding these agreements is precisely what separates the companies on the rise from those falling into obscurity, the Apples from the HPs, the Googles from the AltaVistas. So, I encourage you to take a moment and think about how the rules are being rewritten with every tweet and every shiny new widget. How do these new rules affect your business? How should you respond?

**Update** Bank of America drops fee!  Check out the Wall Street Journal article.

Jim Keeney