Could Higher Fees Be Good News?

As a consequence of the Dodd-Frank financial regulation bill, banks are now constrained in their ability to use debit card “swipe fees” as a means of earning money. It should come as no surprise that this has consequences throughout the system. In particular, it means banks are less interested in maximizing the number of debit cards they issue than they used to. In response, we should expect to see a variety of new fees from banks. In particular, since administering a checking account costs money, banks are now going to be less interested in hosting small-dollar checking accounts.

On twitter yesterday, Steve Randy Waldmann was advancing the argument that this could be a good thing in terms of its downstream impacts. In particular, for smaller banks attracting deposits retains an important advantage as a way of attracting funding to conduct basic operations. Large banks have access to other funding sources and are primarily interested in your checking business in order to get various fees. But small banks still want deposits to lend money out. Large banks can offer more in the way of convenience, but under the new equilibrium it will make sense for smaller banks to compete on the basics of price.