The Durbin amendment has caused more than just a stir in the banking world. Everyone has an opinion about who the winners and losers will be when it comes to limiting interchange fees.
In a nutshell, the consensus is that banks are concerned about the impact the legislation will have on their profits, consumers are frustrated about losing rewards and paying more fees and retail merchants are happy.
Loss of revenue is difficult no matter the circumstances, but what’s more important for banks embroiled in waiting for this legislative showdown to play out is to focus on what they can control and be prepared well in advance of the final rules.
Whatever the outcome, after all is said and done, banks will adapt to comply with the new regulations. Some already are phasing out debit rewards programs and experimenting with additional fees and new product pricing/bundling strategies.
This is a great opportunity for banks to evaluate new business approaches, not because of the proposed regulations but to keep up with consumer preferences and market changes.
Credit use is on the decline so it makes little sense to restrict debit card use or make it less attractive, even if lower interchange fees make it a less profitable product. Increasing debit usage can be one component of increasing overall profitability.
There are several steps banks can take to assuage the loss of revenue if the Durbin amendment moves forward as it is currently proposed. Banks are attempting to negotiate the current cap, since the appeal to delay the final ruling did not pass.
The first is to focus on making the bank’s demand deposit offering the consumer’s primary account. Customers should transact their daily business in this account, it should be their debit account of choice, and receive the bulk of their direct deposits.
Second, banks need to focus on increasing wallet share by cross-selling additional products to customers with checking accounts.
Certainly opening a savings account with the demand deposit account (DDA) is an easy place to start, then moving the customer into credit cards, auto and home loans, etc. Studies have consistently shown that greater wallet share increases the probability of being the primary account.
Another key to addressing profit loss is to better manage cost reductions. Expense reduction alone cannot solely bring profitability back, but it can have a positive impact. This can be achieved by looking more closely at data options and fraud losses.
The first item to target is the data sources used to open accounts. These include compliance and fraud checks. In the past eight months new resources have been introduced. Where there were once only a couple of providers, there are now nearly a dozen providers with powerful new models.
For example, in the DDA fraud or closed-for-cause space, seven providers now offer products that use a mix of known abuses and statistical models to provide a greater insight than even before. Along with reducing losses with better data, you may also be able to reduce your data costs.
Additionally, evaluate your process for account maintenance. Again, using new data sources and models, you may be able to catch a greater level of abuse and fraud before it catches you.
One of our data partners ran a study for a top-50 bank that predicted 17,000 accounts that later defaulted. Better risk and fraud reduction also will certainly reduce the need for collections down the road, yet another cost saving strategy.
Finally, consider the technology that is running your models and account opening process. While there seems to be agreement that statistical modeling can have a great impact on the bottom line, few institutions have the flexibility to move their models quickly into production and make real-time decisions.
Think of all the accounts closed at the start of the financial crisis potentially held by valuable customers. With nothing more than a spreadsheet, business analysts could not separate the wheat from the chaff, resulting in the loss of thousands of customers who are now alienated.
It is easy to lose sight of the big picture when focused on a potentially debilitating new set of requirements. What the Durbin amendment boils down to is that regulations come to pass and financial institutions incorporate them into their compliance structure.
There are many steps banks can take to promote profitability regardless of how the rules shake out.
While new regulations can bring their fair share of headaches, focusing on what can be controlled will possibly make them less painful to bear. In fact, more benefits will likely be derived from a proactive rather than a wait-and-see response.
Eric Lindeen is the marketing director at Zoot Enterprises.