Bank Makes Plans For Making Up Lost Interchange

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MINNEAPOLIS — U.S. Bancorp no longer plans to bide its time as competitors figure out how to recoup fee income regulated away by the Durbin amendment.

The 12-cent debit interchange fee cap proposed last month by the Federal Reserve forced U.S. Bancorp to rethink its strategy, Chairman and Chief Executive Richard K. Davis told analysts last week on a conference call reviewing the Minneapolis company's fourth quarter, reported American Banker, an affiliate of Credit Union Journal.

The company, the fifth-largest U.S. bank by deposits, will start taking actions by the middle of the year to offset the impact of the regulation, Davis said. Potential measures include changes to checking account pricing, reductions in debit awards and the charging of a debit card fee.

Davis said the company also will "be working behind the scenes" to persuade the Fed to base its fee standard and a broader set of costs incurred by debit card issuers. Under the December Fed proposal, summarized in a staff memo, interchange fees could only be used to cover an issuer's cost of authorizing, clearing and settling transactions. That equation leaves out costs for debit card distribution, branches, relationship management, fraud coverage and other overhead.

American Banker reported that Davis said the 12-cent cap is "so sufficiently and absolutely below the cost of doing business that we no longer have the luxury of waiting" for other banks to move first, a strategy that would have allowed the company to observe what worked and what didn't, and perhaps would have helped the bank gain market share along the way from customers upset by new fees or changes made by competitors.

"I was actually hoping that we would have a couple quarters to watch everybody else's actions," Davis said. And now? "I don't want to take that luxury because we now think that's taking risk," he said. He predicted that the industry essentially would move in lockstep, with no noticeable laggards among the biggest debit card issuers.

Chief Financial officer Andrew Cecere said that without any mitigation measures, the company's annual debit and prepaid card revenue, which was $515 million in 2010, would be reduced 75% beginning in the second half of this year.

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