A new federal law curbing fees on debit-card transactions could wipe out $9 billion in revenue annually for issuers.
The estimate comes from CardHub.com, a credit-card comparison website that has access to broad industry data. Banks are scrambling to claw back some of the lost revenue from this and prior regulatory changes. Among the new tactics being considered: emphasizing prepaid cards, which are exempt from the new rules.
Banks are also responding by adding new fees to existing products, such as checking accounts, and watering down debit rewards programs.
It isn't known yet how much of the lost revenue banks can make up.
The rule is one plank of a raft of new regulations, dubbed the Durbin Amendment, which were a part of the financial-overhaul bill enacted in July. It calls for the Federal Reserve to determine that rates on debit-card transaction or interchange fees are "reasonable and proportional," and that they cover the "actual incremental cost" of the transaction. The Fed still has several months to set new terms.
"The Durbin Amendment could significantly impact consumers by increasing the cost of their everyday debit card transactions, limiting their payment choices and impacting industry innovation," said David Owen, head of Bank of America Corp.'s (BAC) payment products unit, which oversees debit and checking products.
Banks are already wrestling with credit-card rules implemented earlier this year. Those rules restricted interest-rate increases and curbed credit-card fees.
Odysseas Papadimitriou, chief executive of CardHub.com, estimates that if the Fed cuts interchange fees by half — considered a possible scenario by the industry — debit-card issuers will annually lose $9.1 billion, or $18.35 per debit card, in revenue. The calculations are based on industry data and regulatory filings from Visa Inc. and MasterCard Inc., who have traditionally set interchange rates for card issuers.
Where there is legislation, there is a loophole. Banks will likely step up use of prepaid cards, which aren't included in the new rules, Papadimitriou said.
"Prepaid cards operate in a very similar way to debit," said Papadimitriou.
U.S. general purpose debit card purchases totaled $1.45 trillion in 2009, up 7.5% from 2008, according to the Nilson Report, which tracks the payment industry. Spending on U.S. Visa- and MasterCard-branded prepaid cards totaled $49 billion in 2009, accounting for 3.39% of all debit card purchase volume that year. Bank of America, Wells Fargo &Co. and JPMorgan Chase & Co. are the top U.S. issuers of debit cards. The three accounted for 38% of all debit card purchases in 2009, according to Nilson.
Charlie Scharf, head of retail financial services at JPMorgan Chase, said Thursday at a conference that the bank is structuring its business away from debit. In September it stopped rewarding branch employees for signing up new customers for debit reward cards. Starting February, it will no longer issue debit reward cards to new customers.
Also, starting February, customers with broader relationships with JPMorgan Chase — for instance, those who have mortgages or maintain higher balances — will have more choices in avoiding monthly checking fees. But others will be charged higher fees. "We will be appropriately paid for the services we provide," said Scharf.
In August, Bank of America introduced its most basic checking account with a monthly fee of $8.95. Customers may avoid this fee if they sign up for paperless statements and use automated teller machines or ATMs, and not bank tellers, for routine transactions such as deposits and withdrawals. Last month, the firm took a $10.4 billion charge in its third quarter because of "limits to be placed on debit interchange fees ... which will reduce future revenues." It is also testing different checking accounts, allowing customers to choose between a monthly maintenance fee or avoid this fee by using a Bank of America-issued debit or credit card or keeping higher account balances or a mortgage with the company.
Starting this month, Citigroup Inc. will charge a monthly fee of $8 for its most basic checking account. Customers can avoid this fee if they use their account at least five times in a month, including to pay bills and withdraw cash from an ATM. Monthly fees for Citigold — its fully loaded checking account with perks, including free paper checks and no annual fee on certain Citi credit and debit rewards cards — will be $30. Customers may avoid this fee if they satisfy certain conditions, such as maintaining a minimum balance of $50,000 across their checking, savings and money market accounts.
