Dan O'Malley is CEO and cofounder of PerkStreet Financial. He was formerly an executive at Capital One.
Are you addicted to your bank? If you're paying off credit card debt right now, the answer is more or less, "yes."
And you're not alone. Americans are paying $328 million in interest to banks every day. Every single day, just to keep from going deeper into banks' debt. Many in the personal finance blogosphere already view debt as an addiction, and, when you consider that gambling is now widely accepted to be an addiction, it's not a far stretch to see that getting things you can't afford with money you don't have could provide all the requisite habit-forming euphoria you need to become "addicted."
Kicking the Habit is Already Cool
Most Americans prefer to spend their money the debt-free way, with a debit card. It's true: debit card transactions outnumber credit card transactions 2 to 1. This a big part of why I left one of the biggest banks in the country, Capital One, to found a new company designed to deliver the best debit card in the world. I believe Americans who choose to spend their own money and avoid debt deserve to be rewarded. They're making smart decisions. Many of them have moved to debit in the last few years because the debt hangover they were feeling at the beginning of the recession was simply too painful to bear any longer.
Make no mistake: The rise of debit cards before and during the recession has improved the lives of Americans. More debit means less credit, and less credit means fewer families in debt. But it's bad for big banks. If they get fewer people into debt, they make less money.
Thanks to the Durbin Amendment, a new regulation reducing the amount big banks can earn on debit cards, these institutions need to adapt their business models. Guess what they're doing?
If you guessed, "Finding innovative new ways to add value and make a profit," you're wrong. If it weren't for the most vociferous public outcry in the history of fees, which happened last month, these banks would have standardized a fee for just using debit cards. What's the plan being hatched in the marble-clad offices of big bank execs this month? Push customers towards their most addictive drug--debt.
And big banks believe you're so hooked on them that you'll take it.
The Next Step: Getting You to Inhale
Yes, we all know by now that JP Morgan Chase, Citigroup, Key Bank and other major banks reversed their stance on charging debit card fees. And once those banks made their decision, even Bank of America had no choice, but to scrap their best laid debit fee plans. Don't be fooled. While the American people clearly communicated that they won't stand for a "debit card usage" fee, the only message big banks heard was that they need to find a less directly off-putting way to boost their profits.
This is the panacea in my industry: If internal problems cannot be solved, pass them along to the customer.
Watch for interest rates on checking accounts to drop even further. Watch for new fees and increased fees on basic services. Even now, many banks charge a monthly fee on basic checking accounts, and banks like Wells Fargo already charge customers to use online bill pay if your balance is below $5000. It's inevitable. You will pay more or lose value from your checking account if you are with these institutions.
A little food for thought: If your bank is making your checking account more expensive but still offering you a "free" credit card every week, what do you think they're trying to motivate you to do?
Banks that increase checking account fees are trying to discourage you from spending your own money—from spending responsibly. They want you to spend on credit. Bank of America charges some customers $7 to maintain a checking account. Their credit cards are free. And keeping credit cards free isn't the only effort big banks are making to get you to take the risk of unsecured credit card debt.
The Endgame: Back To Credit Cards, Back to Debt Addiction
In the end, there's one thing big banks thrive on: increasing their customers' debt. When I was in my 20s, working at a big bank, I was paid to do exactly that. And I wasn't unique—there were lots of people like me who received bonuses tied to performance and profits. Think about it: How do you increase profits if you're a big bank? You lend more. You get people deeper in your debt. Once they owe you money they can't pay in full, you can bump up interest rates and siphon money out of them while they watch helplessly.
In the next few weeks and months, the credit card offers will get more enticing than ever before.
You'll be offered all sorts of "deals" for getting a new credit card. Watch for new offers for airline miles (rewards for debt). Introductory offers proclaiming 0 percent interest lasting longer than you'd expect ("free" debt). The messages will be delivered by more famous celebrities, with more appealing sign-up offers and grander visions of greener pastures than our current unemployment rates could support. You'll even be offered free checking that's only available if you have a credit card, loan, or mortgage. Don't believe the picture that big banking is about to paint.
New credit card offers have already begun landing on kitchen tables across America. According to the Wall Street Journal, 59 percent of the offers made for new credit cards in the first four months of 2011 included an incentive, compared with 30 percent during the same period of 2007.
How hard are they pushing?
An industry analyst recently predicted a total of 5 billion credit card solicitations will go out in total this year. That's almost twice as many as last year and nearly four times as many as the year before. You don't have to be a banker to see where this is headed.
In case anyone is thinking that credit cards really aren't so risky, you should know that roughly half the families in this country are in credit card debt. If the dinosaurs had as much credit card debt as we do now, and they paid a dollar per hour to get out of debt, they'd still be paying today, because it would take about 115 million years to pay it all off.
Being in credit card debt is something you can't shake. No matter how you change your behavior after you've dug yourself in, credit card debt can haunt you for decades. It's like being addicted but it's worse, because there's no patch for this. There's no gum. If you're mired in debt, the bank owns you… fully.
You Hold the Power to Extinguish a Broken System
Let me be very clear: You do not have to accept this system, You have the power to create change. Just look at how many banks backtracked on charging debit fees. They didn't do this out of the goodness of their hearts—they did this because you made it clear you were not going to accept it.
Let's talk about what else you can do.
Banks are losing revenue right now and their response is to ask you for more fees and debt. Just like your parents told you about any addictive drug—Just Say No.
Move your accounts. Make a switch to a smaller institution that's not impacted by Durbin. Do not let banks push you away from debit cards, and absolutely do not get duped into moving to credit cards if you're a debit user. Believe it or not, I'm not the only CEO trying to change the system. Alternatives to big banks exist. When you move to something better—something you feel good supporting—you are declaring your independence from a broken system. You should feel proud.
In 1994, tobacco company executives testified before Congress that cigarettes weren't bad for your health. The unbelievable brashness of this claim—they thought we would believe it?—woke the country up. Afterwards, 10 million people stopped smoking. In 1998, executives from those same companies again testified before Congress that smoking may, in fact, cause cancer.
Don't let yourself be trapped in bank products that make your life worse. Crush the pack. You have the power to change the system. Ten years from now, you will be able to look back at this moment as the time when we all woke up to our debt addictions. This is just the beginning.
- Read Rick Newman's 5 Ways To Beat New Bank Fees
- Read a timeline of the Occupy Wall Street protests.
- See political cartoons on Occupy Wall Street.
Corrected 12/12/2011: An earlier version of this article misstated U.S. Bank’s stance on debit card fees. U.S. Bank does not, nor has it ever planned to charge fees on its debit cards.