Debit card annual fees: Why most customers shouldn't be charged.

Originally published on Moneylife in June 2014
While many appreciate the progress from ATM cards to debit cards, there are many other bank customers out there who do not see any real reason for shelling out a hundred or five hundred rupees every year as annual fees.
The banking industry has come a long way and today, we are almost at a stage where everyone has a bank account. Those of us living in cities could have two and those living in metros could have even three to five accounts. I remember reading in a newspaper that the upper middle class has at least six bank accounts per family. From being a privilege for the wealthy and for those working in the Government services, banking has become a basic necessity of life. In fact, most parents get a bank account in the name of their child as soon as they get him/her into school. How could they not? After all, a whole bunch of bankers run around them explaining the advantages of opening a child account, how it could help the kid become responsible, how it will help in education, and so on. The moment you open a bank account, a recurring deposit in the name of the kid and a life insurance policy are up next. That's okay. After all, the world need to grow.

Banks want to have their cake and eat it too. Guess what, they have been successful at it.

Over the last many years, I have been looking at the changes happening in the banking sector. After computerization of the banking industry, banking has more to do with marketing than with calculations. The computers and software take care of all the calculations and thus, the banks are now better positioned to use human resources to generate revenue. Not so long ago, a bank employee would spend majority of his time in accepting deposits and making payments across the cash counter, making him a cost centre for the bank. Modern bankers (like ICICI Bank, HDFC Bank, etc) aggressively market their products by showcasing their services like ATMs, Internet Banking, Phone Banking, etc, and thus, generate additional revenue for the bank.

Inter-bank fund transfers through internet banking attract charges too. Internet banking was supposed to benefit the bank by reducing the cheque clearing work, thereby leaving behind a lot of time for bank employees to work on revenue fronts. Its a different story that phone banking, which was supposed to help customers on a toll free number, is now offered on a paid line. So, all these services that came up to help customers have actually helped the banks more. Of course, no one can deny the many conveniences we enjoy today. The point I want to make is that all that was introduced as free and to benefit customers, now comes at a cost (plus convenience) to customer and a revenue (plus convenience) to the banks.

Even an SMS sent to customers are subject to charges now. The SMS initiative came as a measure to ensure safe banking and now it costs the customers to ensure that he banks safely.

Debit Card Annual Fees - A trap?

Before declaring charges for their SMS facility, the banks introduced annual fees for debit cards. This one is perhaps the most annoying charge that today's customers pay. I personally had nearly 10 debit cards on my name up till some time ago (the side effects of working in the banking and financial services industry). One fine day, I realised that I had been paying a lot of money in the name of "Debit card annual fees". At Rs 110 per card, I had been paying almost Rs 100 a month. Since I would hardly use those cards I started closing those accounts one by one and yet, I was left with five of them. I was still stuck with paying Rs 500 plus taxes for no sensible reason whatsoever.

Banks benefit more in terms of time and cost than the customers

Banks came up with the idea of ATMs in order to save time for customers and more importantly, for themselves. While customers do benefit from these cards, the banks benefit far more. Imagine the bankers sitting around and processing cash withdrawals of Rs 100-1,000 to thousands of customers everyday in today's world.

A large number of customers still do not extensively use cards

It is a well known fact that a large number of customers who possess these cards, especially the ones in rural areas or the ones in business, seldom use these cards. Sole proprietors and, to some extent, Partnership firms have cash on hand, which they use for their daily expenses and this cash is received by them in the course of daily business. Most of their withdrawals are in the form of payments to third parties by cheques or transfers. So, the card lies in their pockets or lockers and they keep paying the annual fees.

Use of debit cards for shopping is very low

Banks promoted debit cards saying that these cards can be used at ATMs of other banks as well as be swiped at merchant terminals. However, the number of customers using debit cards for shopping is very low. Most customers who have a credit card would prefer swiping their credit card, thereby getting more than a month's time to pay the amount, rather than swiping a debit card where the amount goes off immediately. It is only when there are some offers, discounts, cash backs, etc. that customers consider swiping their debit cards.

Five transactions only

The banks' promotion of debit cards quoting that these can be used to withdraw cash from any ATM doesn't appeal anymore. After all, only 5 such transactions in a month are free and the customer has to pay for the 6th transaction. However, banks have continued to offer unlimited transactions at their own ATMs even today.

Banks should bring back the no-fee ATM card

While adapting to technology should be encouraged, banks should also provide for such customers who do not want to use technology that doesn't help them. Its like asking a banker to learn Hadoop or Big Data, as they are the latest technologies. There are some banks who are still issuing ATM cards on request. In fact, I got an ATM card from one of the leading private sector bank on placing a request for the same.

There was absolutely no need for the bankers to do away with an ATM card and make the customers opt compulsorily for debit cards. An ATM card is a boon for those customers who do not use the ATM often or do not intend to shop with it. Banks are making big bucks with these charges but it is time they realize that they focus on tailored solutions instead of making generic products. While many appreciate the progress from ATM cards to debit cards, there are many customers out there who do not see any real reason in shelling out a hundred to five hundred rupees every year. In fact, there are awkward situations when such charges result in a drop in balance, and such a drop results in a cheque bounce or going below minimum baalnce - all attracting furthermore charges. Online consumer forums are full of such complaints.
Reintroducing ATM cards would be a friendly step to help customers who have too many debit cards, or those who seldom use them. Levying an annual fee on all cardholders could be legally permissible but when you look at it from the ethical or customer service perspective, it may not fly well with customers. Although, abolition of the annual fees in totality would be more of a dream for customers.