Of Fee I Sing

Are the pleasures of using a debit card so great that we’d pay $5 a month for them?

Tens of thousands of Bank of America customers certainly don’t think so, as they’ve rebelled against the new fee that the company plans to impose on anyone who uses one of its debit cards. “The higher costs” suddenly being forced on customers by Bank of America and other financial institutions, as well, “will hit young people with modest balances especially hard,” The Wall Street Journal noted.

In response to the broad backlash, Bank of America has stepped up its own lobbying efforts, pointing out that the new fees will make up only a portion of income that’s been lost because of new federal regulations. “We have a right to make a profit,” CEO Brian Moynihan declared.

As we’ve notedPeter Drucker was all about listening to what the customer values and trying to deliver it. He was also, in a number of circumstances, skeptical of price hikes. If an executive uses his “leadership position to raise prices or to raise profit margins except by lowering his cost, he sets himself up to be knocked down by anyone who uses entrepreneurial judo against him,” Drucker warned in Innovation and Entrepreneurship.

Nevertheless, Drucker was also sympathetic when it came to the choices that bankers face.  It’s precisely the customers with small deposits—the ones hit hardest by the new fees—that give banks the biggest headaches.

[EXPAND More]“The American commercial bank (like all commercial banks) derives its profits from the use of the customers’ deposits,” Drucker wrote in Managing for Results. “At the same time the services with which it competes for deposits are aimed at enabling the customer to operate with a minimum of cash and, therefore, with a minimum of deposits. The more value it gives customers, the less well it is likely to do itself. The commercial banks get paid, in other words, for the exact opposite of what the customer really buys.”

The notion that simply lending out money for more than it pays in interest should allow a bank to make up for other shortfalls didn’t persuade Drucker, either. “By now, most U.S. banks, especially the larger ones, know that they cannot hope to continue to build their business on the ‘spread’ of interest rates between what they pay for their money and what they charge for it,” he observed in The Frontiers of Management. “They will have to shift their income base to fees and commissions.”

What do you think: How much scolding does Bank of America deserve for its new fee—or is the outcry an overreaction?[/EXPAND]