Warning: Debit Card Woes Ahead

If you regularly use your debit (ATM) card to make purchases, or if your card earns airline miles or other rewards, get ready for fewer benefits and more fees. New regulations cap the fees banks can charge merchants to process debit card transactions. And the big banks, unwilling to lose even a few pennies of potential revenue, have decided that if they can no longer get fat fees from merchants, they’ll ding their card users instead. You’re not really surprised, are you?

Here’s at least some of what’s happened so far:

• Wells Fargo will soon test $3 monthly fees for debit cards on accounts held by residents of Georgia, Oregon, New Mexico, Nevada, and Washington; Sun Trust has already started issuing debit cards carrying a $5 monthly fee; Regions Bank will add fees to some cards starting in October; and Chase is testing monthly fees in a few areas.
• Chase has already ended its reward program for debit cards, and industry mavens predict many other banks will follow suit.
• Several banks say they won’t assess the fee if you “don’t use” the card. Presumably, they mean don’t use it to make purchases. If they also mean don’t use it to withdraw cash from a bank-owned ATM, that leaves the question of why have a card at all if you don’t use it?

For now, banks say they will exempt some users from future fees, at least so far: If you carry a big balance or do other major business with your bank, you’re probably off the hook.

What should most people do now?

• If your current debit card earns rewards, figure those rewards will go away quickly. If you want to keep earning rewards, your only option will be a credit card, where banks are still allowed to gouge merchants. As long as you pay your balance off in full, using a credit card won’t cost any more than using a debit card, and credit cards actually provide some valuable buyer protections that debit cards do not.
• If you routinely use your debit card for purchases, and your bank starts dinging you with a fee, move your checking account to a different bank. For now, lots of big banks still don’t add fees, but that could change pretty quickly.

Longer term, however, you can expect to pay more using plastic. Merchants—with airlines leading the parade—are starting to add fees for credit-card purchases. Several years ago Australia banned contracts requiring merchants to charge no more for credit card purchases than for cash, so consumers there already pay a premium for many credit card purchases. More recently, Lufthansa announced it would start adding a fee for credit card purchases in some areas outside the United States. Allegiant and Spirit already charge stiff fees for online credit card bookings—and the only way to avoid them is to schlep to an airport when the airline ticket counter is staffed to buy your tickets there.

Again long term, look for a drive by big airlines to keep getting closer to the one bank that co-brands their credit card. Airlines are fighting with online travel agencies such as Expedia and Travelocity to determine who “owns” you as a customer—each wants to keep the added potential revenue from selling you hotels, rental cars, insurance, and such with your air ticket—and one way they’ll do that is to tie you into a credit card partnership. You already see it with the deals the big three airlines have with their co-branding bank to give cardholders one “free” checked bag and other perks. Presumably, if the airlines start adding fees for credit card purchases, they’ll waive those fees when you use their partner banks’ cards.

All in all, you have to remain vigilant. Keep your eyes on statements and announcements you get from your card issuers, and be prepared to move accounts if you see some unreasonable fees.