Bankers Put Their Debit Fears (And Frustration) On Display

LAS VEGAS–The debit card is dead. Long live the debit card.

That was the silent cry of consumer bankers attending the ATM, Debit & Prepaid Forum here last week that became part rally, part wake. Far from Occupy Wall Street and the epicenters of Bank Transfer Day, executives rubbed shoulders at the Bellagio, sipping prosecco and traipsing to after-parties in a bar modeled after a chandelier.

More than 1,100 bankers, regulators, card executives, consultants and vendors gathered for the annual event devoted to the debit card and related products. But all the pizzazz and Vegas glitter could not hide the bankers’ frustration as they tried desperately to figure out where their debit card strategies all went wrong and what, if anything, they can do next.

“You’re not going to innovate your way out of this ditch that we’re in … quickly,” Whitney Stewart, senior vice president at SunTrust Banks Inc., told audience members during a Nov. 3 panel discussion (see story).

That ditch opened up Oct. 1, when regulations essentially halved most issuers’ debit card interchange revenue went into effect. And one industry attempt at “innovation” had messily imploded mere hours before the conference began, when Bank of America Corp. reversed its plans to start charging customers for using their debit cards (see story).

Debit cards no longer may be as profitable for issuers, but they are still popular with many customers–so popular that the industry’s attempts to start charging for their use drew widespread protests and criticism from politicians including President Obama (see story). 

SunTrust this summer became one of the first banks to start charging customers $5 per month for using their debit cards, and Stewart said the effort largely was successful until BofA got involved.

“It was going well. We were selling accounts, existing customers were sticking with us. We never could have anticipated the consumer reaction that came from Bank of America’s announcement … or the unfortunate comments our president made, which were uncalled for,” Stewart told attendees.

Now that BofA put the final nail in the coffin of debit card fees, bankers at the conference had few answers about what to do next.

Laurie Readhead, BofA retail banking executive, had the unfortunate luck to be scheduled to speak about the bank’s “evolving consumer model” on Nov. 3, two days after her bank backtracked on fees. She persevered, briefly defending BofA’s debit-fee efforts as “transparent,” if not fully thought out (see story). 

“We wanted to be clear with our customers that we were looking at rolling out a debit card fee. We did not know yet how we were going to do it, but we wanted to go ahead and put it out there," she said during a presentation at forum, which was sponsored by PaymentsSource publisher SourceMedia Inc.

But Readhead, who took no questions after her speech and declined interview requests, had few concrete answers about what the industry should do next.

Nor did many others. Robert A. DeAngelis, an executive vice president of KeyCorp’s community banking operations, warned attendees that efforts to charge customers more for their checking accounts would create a “vicious cycle” and a “payments dark age.”

KeyCorp wound up on the right side of the industry’s failed debit-fee experiment by deciding not to charge customers debit card fees, and DeAngelis said in an interview the bank has picked up some customers from the bigger banks that did try charging fees.  (He called the evidence “anecdotal” so far and would not quantify the number of customers KeyBank acquired in the past month.)

Other executives at the conference also rejoiced in their larger rivals’ misfortune.

“God bless Bank of America for announcing the $5 fee. It’s created an immense opportunity in the marketplace, … and we think that will be a very material item over the next couple of years,” said Jim Hanisch, an executive vice president of the Co-Op Network, which processes ATM transactions for credit unions. 

The Credit Union National Association trade group estimated last week that 650,000 consumers have closed their bank accounts and transferred their funds to credit unions–and that was before the Nov. 5 Bank Transfer Day.

In his Nov. 4 presentation, DeAngelis told attendees Key is focusing on building customer relationships, which is what most in the industry are trying to do. But trying to gain more business from existing customers will not immediately solve the industry’s shortfall.

The new regulations will eliminate several billion dollars of the revenue issuers are used to collecting from the debit interchange fees merchant acquirers pay. The Federal Reserve Board in June approved capping those fees at 21 cents per transaction plus possibly a few more cents to cover fraud costs and for meeting certain central bank standards, almost half of the former 44-cent per-transaction average (see story).

For example, for a $38 debit transaction, a bank can charge 21 cents plus 1 cent for fraud prevention, if qualified. Additionally, under the rule, it could charge 5 basis points of the amount of the transaction, in this case 1.9 cents. The total debit transaction in this scenario would be 24 cents.

 The Fed’s rules were required by the so-called Durbin amendment to last year’s Dodd-Frank financial reform law, sponsored by Sen. Richard Durbin, D-Ill. His name was invoked frequently and rarely lovingly over the conference’s four days.

“The theme that is going to permeate our conference, of course, is Durbin,” conference Chairman Tony Hayes, a partner at Oliver Wyman, told attendees as a welcome. (Speaking hours after BofA reversed course, Hayes also got rueful laughs when he nodded at “the actions the industry is taking … in terms of new debit fees, or not.”)

DeAngelis compared the Durbin amendment to a “meteor hitting the earth” of the payments industry. Leland Englebardt, MasterCard Worldwide group head of global network products, took a familiar, if futile, swipe at the law, telling attendees “We’re only 33 days into the new era–of government price-fixing” (see story).

Even the merchants who lobbied hard for the Durbin amendment complained about its effects, although their main concerns were far from those expressed by most of the conference’s attendees.

“I don’t think we gained anything from Durbin … other than we identified an advocate in the Senate,” Robert Donovan, U.S. assistant treasurer of McDonald’s Corp., told attendees.

The fast-food chain does not expect to pay less in interchange because of the law and even could pay more per transaction because most McDonald’s purchases are small-dollar amounts that previously cost less than 24 cents per transaction, he said.

Michael Cook, the treasurer of longtime payments industry foe Wal-Mart Stores Inc., also cited “some disappointments” with the final law. But his outlook on regulation was much sunnier than that of most bankers at the conference.

“It’s a good start for future regulatory reform that will take place in credit as well,” Cook said. “There’s a lot of shoes to drop yet.”

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