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7th October 2011

Debit card fees may change mpayments and lose banks money
Opinion

Every day there are news items concerning mobile payments being the "Next Big Thing" for the payments sector with a scramble to release NFC enabled phones. Elsewhere Newslink covers the latest market forecasts showing exponential growth for the mobile payments market. However no one has asked the question as to how the Bank of America for definite introduction, and Wells Fargo pilot of debit card fees will affect this market. Assuming that mobile payments will be treated in the same way by the banks as usage of a debit card at point of sale, and it is hard to see how this would not be the case, then what will the fee do to "The Next Big Thing" in the US? There are two scenarios possible, both in which the banks applying the debit card fees are the losers:

-1 Customers are slower to, or do not adopt the mobile wallet and continue to use credit card or cash. So the banks miss out on the growth in debit card fees through higher volume of debit transactions.

- 2 The bank customers' friendly mobile operator's mobile wallet which incurs no monthly charge gets the business. (Isis must be laughing all the way to the bank. This must be the best news they have had since their formation)

Some may argue there is a third scenario - that the fee is so small that customers will forget about it. Some may do so, however to expect the great majority to do so would be to put economics before emotion, which usually proves to be fatal in decision making.

The important thing here is that banks have never argued that they cannot make a profit under the Durbin amendment fees on debit cards - only that the profit which helped subsidise 'free banking' will be reduced. If bank customers switch to credit cards from issuers other than where they have their checking account or to mobile operators' mobile wallets then the smaller profit from debit card income the bank might have received could be replaced with no income at all. The significance is not today's equation of debit card profit under Durbin but what it would be in three or four year time should the banks continue to get the forecast growth.