JPMorgan and Bank of America Ponder Suicide

Posted on 11/03/2011 by


Originally published on
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Major banks in the United States, including heavyweights JPMorgan Chase and Bank of America, are planning on initiating a spending cap on debit card purchases. Neither bank have been so kind as to share exactly what the cap will be, but it is posited to be either $50 or $100 per transaction. The cap will be unavoidable: even having one’s debit card swiped as credit will not remove the cap.

So, how nice for you, that you’ve saved $800 for a new couch. Cash or cheque, please; the vaunted convenience of debit has been stripped away. This is due to the supposed ‘Wall Street reform‘ which Congress recently passed. As best I can tell, the specific portion of the ‘reform’ bill was the Durbin Amendment:

a provision in the final bill aimed at debit card interchange fees and increasing competition in payment processing…  The law applies to card issuers with over $10 billion in assets, and these issuers would have to charge debit card swipe fees that are “reasonable and proportional to the actual cost” of processing the transaction.

The Yahoo article given at the top of this post gives good overview of why this is pushing the banks to establish hard caps on debit card transactions. However, the effects of this cap are what I’d like to focus on, rather than the reasons for institution the cap.

To put it bluntly, BofA has chosen to gut its credit and debit card income. It is actually quite possible that the credit/debit card systems require the average fee per swipe to be 44 cents, because according to a source of mine, the software platform underlying that system is about 40 years old. Instead of taking the opportunity to upgrade an out-of-date system, and shed a failing market, (ie credit cards, more on that in a moment,) these major banks, BofA included have decided to just chuck the whole thing.

It should go without saying that a $50 — or even $100 — spending cap per purchase is highly inconvenient for the user. I surmise the card-issuing banks expect to force users into using credit cards, so as to avoid the cap and preserve the convenience of cards in general. What the bright boys on Wall Street seem to have overlooked is that there is serious debt revulsion ongoing in the United States. Credit card debt is shrinking, not growing — down 13.2% since 2008, source –  because people are over-indebted and looking to clean up their finances.

Switching over to debit cards is a good way to get away from debt: the money is yours, after all, not borrowed from the bank. It will be impossible to make large purchases, or even moderate ones, with a $50 or $100 purchase cap, so users make a very simple choice: drop their debit cards for large purchases and switch to cash, cheques, and money orders. Those methods will be easily taken up by people, but the major banks will make almost nothing off of these transactions. Cash, cheque, and money order profits are trivial, at best.

In short, in pursuit of milking their customers harder, these major banks, like BofA, have instead given their long-suffering customers a very good reason to jump ship. I suspect customers will vote with their dollars by closing out accounts and moving to friendlier institutions, like fee-light local banks, and ever-popular credit unions.

This suicidal business decision is impressively short sighted, and seems to confirm that the BofA and other such institutions cannot survive without the US Federal Government and the Federal Reserve System footing the bill at every turn. Stupidity should be expensive, and I suspect that JPMorgan and BofA are very expensive indeed. Too bad the US people are forced to pay for it.

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Posted in: Analysis