Which Financials Will Benefit From Debit Card Fees?

Includes: BAC, C, COF, HSBC, JPM, MA, RF, STI, TD, V, WFC
by: David Zanoni

It is difficult to hear about a price increase on anything. It is especially difficult to hear about a price increase on something that has been free for decades. Such is the dilemma facing Bank of America (NYSE:BAC) customers as BofA just announced that it will charge customers $5 monthly when they use their debit cards for purchases. There are a lot of raging customers blogging that they will close out their BofA accounts because of this. This looks like the recent conflict over the Netflix (NASDAQ:NFLX) price change fiasco that outraged many of their customers.

Current Bank of America customers planning on switching banks must realize that other banks are also planning on implementing fees for using debit cards for purchases.

  • Wells Fargo (NYSE:WFC) will be testing a $3 monthly fee in select markets starting on October 14, 2011. Wells Fargo customers in New Mexico, Oregon, Georgia, Washington, and Nevada will be affected by this new fee.

  • SunTrust Bank (NYSE:STI) will be implementing a $5 monthly debit card fee starting on November 10, 2011. It has already been charging new customers this fee since July.

  • Chase (NYSE:JPM) will begin charging customers a $3 debit card fee starting in February 2012 for Wisconsin customers.

  • Regions Financial Bank (NYSE:RF) will begin charging a $4 debit card fee in October 2011.

  • HSBC Bank (HBC) is currently reviewing the impact of charging a debit card fee.

Which Banks are not planning on charging fees?

Fortunately, Citigroup (NYSE:C) came forward and said earlier this month that they will not charge a debit card fee, stating that the fee would be “a huge source of irritation” to customers. I’m happy to see that it understands the importance of not charging customers for making debit card purchases.

Other banks that currently have no plans to implement a debit card fee include: Citizens Bank, Capital One Bank (NYSE:COF), and TD Bank (NYSE:TD).

Thoughts and Recommendations

I think that not charging a debit card fee will prove to be a powerful marketing tool for Citigroup and the others who don’t impose a fee. We will probably see a small percentage of customers switching banks as a result of this fee and brand new customers choosing the banks that don’t have the debit card fees. This fee reminds me of the Ally Bank commercial where they give a girl a bike, but only let her ride within a small rectangle which only allows for a few inches of movement. It’s good to see that some banks understand this annoyance and focus on the needs of the customer. I think that if Citibank and the others stand pat on not imposing debit card fees, they will gain new customers. This gain in new customers should also reflect positively in Citi's stock price.

Ultimately, I think that the debit fee imposed customers who are already accustomed to using debit cards at the point of purchase (those who don't switch banks) will switch to using credit cards instead. I think that Visa (NYSE:V) and Mastercard (NYSE:MA) will continue to thrive as they collect fees every time their cards are used. The credit card companies are by far the best financial companies to invest in - much better than the big banks. Visa and Mastercard have five year expectations of annual earnings growth of about 19%, which is 5 - 10 percentage points higher than the earnings expectations of most of the big banks. The credit card companies are also immune from any credit default risk as the issuing banks take on that responsibility.

I think that the credit card companies will prove to be the best investment as a result of the debit card fees and will continue to outperform the large banks and the market over the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.