Fallout From Reg E Beginning To Be Seen In Markets
SAN RAFAEL, Calif.-A decline in interest rates being paid on consumer deposits during July is being attributed by many analysts to a Reg E deadline that is nearly here.
Interest rates are just one of many dominoes in the market being pushed over by the new rule. Many of those same analysts are also predicting the elimination of free checking — at least as consumers know it today — may be next. Moreover, CUs will find members being hit by "gotcha" fees at other institutions, as well (see related story).
Under the new changes to the Fed's Reg E, Electronic Funds Transfers Act, by July 1 credit unions and banks had to obtain permission, or opt-in, from new members and customers to provide them with automatic overdraft protection on all non-recurring debit card transactions and ATM withdrawals. By Aug. 15, they must obtain opt-in for all their existing members/customers. While estimates on lost revenue due to Reg. E vary, consensus among sources is that the total for financials will be in the billions of dollars.
Analysts agree that banks and credit unions will continue to make adjustments to compensate for regulations that have passed and which are still spending, that reduce revenues. There have been numerous changes already to credit card pricing (see related story), due to the CARD Act.
So far, the most noticeable change related to Reg E has been a sharp decline in deposit rates, pointed out Dan Geller, EVP of Market Rates Insight here. "Right after the July 1 Reg E deadline, the national average for deposits for financial institutions began to drop. It declined eight basis points during July. Even though the national average for deposits is on a downward trend, that is a very sharp and sudden decline for such a short period of time," Geller said. "The fastest way to make up for a revenue shortfall, especially in a soft lending environment, is to lower expenses."
Geller said the move by financials will begin to make up for what Market Rates Insight projects to be a $15-billion annual loss in non-interest income from Reg E. Geller noted that the average institutions can make up for the dip by lowering the average APY on deposits by an average of 19 basis points on an annualized basis.
Others believe Reg E will introduce a new era of free checking with an asterisk. Hank Israel, director of payments and checking for Novantas LLC, a New York-based consultancy, predicted in a July 12 Credit Union Journal story that free checking will eventually only be available to those who meet other relationship requirements, such as a number of monthly transactions, and a minimum relationship balance.
Israel suggested that banks will feel the most pressure to eliminate free checking, pointing out that as much as 30% of checking accounts at commercial banks were "underwater from a profit situation."
Ron Zanotti, SVP-sales for Dynamic Card Solutions in Englewood, Colo., stated earlier this summer (Credit Union Journal, June 7) that Reg E, as well as new interchange rules, will not only eliminate free checking but prompt institutions to seek many more ways to drive debit usage so transaction volume makes up for revenue shortfalls.
But there may be big benefits for credit unions that keep free checking, according to Filene Research Institute Executive Director Mark Meyer. Referring to a recent Filene study, "Overdraft Regulation: A Silver Lining to the Clouds?" Meyer said Reg E is projected to reduce CU ROA by nine basis points. But banks' greater willingness to eliminate free checking may encourage credit unions to keep the free product to increase market share with this sticky account. "Credit unions that hold the line with free checking will see big market share gains," Meyer said in a May 31 Credit Union Journal article.