The largest U.S. card issuers could lose more than $2 billion of annual debit-related revenues from the combination of regulations limiting overdraft fees and pending debit-interchange rules, according to a report from Javelin Strategy and Research.
These reductions probably will force card issuers to search aggressively for replacement revenue, at least in the short run. Issuers are likely to step up their marketing of reloadable prepaid debit cards, which are exempt from the new rules, Javelin said this month.
Issuers also are likely to boost offers to lure back their more-lucrative credit card customers who switched to using debit cards during the recession, Javelin said.
But such strategies may be fleeting because it is almost certain that, during the present "environment of enthusiastic regulation of the payments industry," prepaid cards will eventually fall under rules limiting their fees.
And credit card interchange is likely to be next on regulators' agendas, the report's authors contended.
Javelin said that "it will take a year for the dust to settle" from adoption of debit-interchange rules and that issuers should plan for "the next wave of [payment] industry reforms."
The biggest looming threat to issuers' card profits, Javelin said, is likely to be debit-interchange rules included in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law July 21.
The law calls for the Federal Reserve Board to set "reasonable and proportional" debit-interchange rates, which would take effect next year.
It is too soon to know how significantly the new rates will affect debit-interchange revenue, but Javelin estimated that $3.2 billion to $6.4 billion in debit-interchange fees could be at risk.
A complicating twist is the law's exemption of institutions with less than $10 billion of assets.
That provision, combined with the fact that the law directs the Fed to consider individual issuers' fraud-prevention costs in shaping debit-interchange rates, could end up producing a multitiered interchange-rate structure, Javelin speculated.
Such a system could be "a nightmare" for the Fed to maintain and for industry participants to comply with, Javelin suggested.
Clever work-arounds may emerge to the new debit-interchange rates, including for large banks that might use banks with less than $10 billion of assets as agents. Hybrid payment options, combining exempt general-purpose, reloadable debit cards with traditional debit cards, also could surface, Javelin said.
But the researchers warned that the new consumer watchdog agency probably would frown on any attempt to evade the new regulations.
