How Bank Of America Became Like An Airline

| About: Bank of (BAC)

Bank of America's (BAC) $5/month fee on debit cards may be the most misunderstood pricing move of the year.

It turns out to have a lot more in common with airline pricing decisions than anything previously seen in banking.

Airlines are careful about increasing fares. If other airlines don't follow an increase, it's withdrawn. Prices are adjusted continually in response to competition, and perceived changes in demand.

Banks are in the early stages of this complex pricing dance.

In the case of the $5 fee, BofA is sending a signal to other big banks with extensive ATM networks, and a hope they will follow suit. After all, consumers can avoid the fee by removing cash from Bank of America ATMs for small purchases, and by using credit cards for larger purchases.

Many small merchants hope they do just this. Having finally gotten the right this year to set minimums on debit and credit purchases, in defiance of Visa (NYSE:V) and MasterCard (NYSE:MA), they're all for cash. The BofA move encourages cash, because they're not yet charging for using a BofA ATM.

So far competitors are moving cautiously. Wells Fargo (WFC) will test a $3/month fee, and so will Chase (JPM), in selected markets. Citibank (C) is playing it cagey, imposing new fees on small accounts and planning to advertise the lack of an explicit debit card fee.

If the result of the fee is that low-balance customers leave the big banks, the big banks will be quite pleased. With interest rates set to be near zero for many years, the only way toward higher profits is to raise average balances, and fees like this are a good way to do it. Let someone else have the unprofitable customers.

The pricing moves have less to do with Dodd-Frank or Durbin than with Ben Bernanke. With interest rates near zero, banks can't get enough low-risk spread from demand deposits to justify even a free account. And small accounts are truly demand deposits. With little balance on-hand, banks can't easily roll that money into a commercial loan as they might a higher balance.

Still, all the new fees are a poke in the political eye to the big banks, which are now facing media calls for small-balance customers to switch to credit unions and to educate themselves as air travelers are educated.

That may not be the only result. If BofA's move to rationalize its books fuels political protests against banks and their supporters in Congress, bank stocks could start looking more like airlines than anything else, and for years to come.

Note that in the case of airlines, it took years of mergers and pressure on consumers to restore any measure of profitability. And I still wouldn't touch airline stocks with a barge pole.

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

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