Five Reasons Why Durbin Rules Will Add To Need For Rewards
WILMINGTON, N.C.-Credit unions and banks will find debit and credit rewards are more important in the wake of the Durbin Amendment rules and not less, according to Bob Giltner.
Giltner, consulting partner with Velocity Solutions, said there are five reasons new rules will enhance the value of rewards programs.
1) Debit Is 15% Of Revenue
First, he said, an examination of revenues generated from the primary banking relationship, the share draft/checking account, shows that interchange revenue from debit transactions generates only 15% of the total a credit union gets from checking. The Durbin amendment to the Dodd-Frank Financial Reform Act proposes to place a cap on interchange fees, which Giltner believes has caused excessive angst in financial circles.
"Durbin is important, but we still only talking about 12% of revenue being at risk, if it is implemented as is," he said.
2) Retention Remains Critical
Giltner's second reason: retention and the number of relationships a financial institution has with a member/customer are linked to the number of times someone swipes a debit card. What is important, he stressed, is that it is "your credit union or bank that they are swiping with."
3) Two Case Studies
Third, reward programs work to drive up transaction activity in a "very economic" way, Giltner asserted, citing two sources. Source "A" is a study in the Journal of Banking and Finance that discussed the impact of credit and debit rewards, which found organizations that offered incentives were able to increase transaction activities, which he said is why so many major banks have expanded rewards programs.
Source "B" is the experience Down Under. In 2003, Australia implemented interchange reform by limiting interchange in a manner similar to Durbin, and rewards programs have continued to thrive. "The key is getting transaction activity."
4) Example from Canada
The fourth reason why debit and credit rewards are more important than ever, according to Giltner, is Dodd-Frank also places restrictions on other potential revenue sources, such as overdraft fees. As an example, he pointed to Canada, where institutions do not rely on overdraft fees to the extent FIs do in the U.S.
"Even if more revenue than interchange goes away, Canada is an example of how to reprice, and how rewards programs continue to be important."
5) Pricing Lessons
Fifth, Giltner said, institutions are still learning how to price according to the "emotional willingness" of consumers to pay fees, not the business case for a fee. "Many people in the U.S. don't want to pay to use a branch, whereas in Canada such fees are common,. Credit unions need to figure out a way to get members to choose the fee they are most willing to pay."
With all that said, Giltner advised CUs to keep their heads up because there are three challenges looming to the Durbin amendment, meaning it may not be implemented to the full extent it was written.
"Even (U.S. Rep.) Barney Frank, one of the co-sponsors, has said he disagrees with the amendment and wishes it had not been attached to the bill," he said. "Beyond politically, there are sound legal grounds to challenge it because of the two-tiered system that separates financial institutions smaller and larger than $10 billion, and the fact the government cannot compel companies to charge less than the cost of delivering a service.
"Finally, from the comments the Fed has received to its proposal, there has been a huge number of responses saying the details cannot be worked out by July-perhaps by the third or fourth quarter," he continued. "If I were a betting man, we should plan for the contingency if it happens, but I bet the Durbin amendment will not be implemented as currently written in 2011."
Giltner advised CUs to prepare for changes, but noted the evidence of Australia and Canada "show we can reprice to drive transactions and rewards will continue to be a key component of that activity."