U.S. Bancorp had expected to wait to see how other financial institutions reacted to recent legislative and policy changes that have or will affect revenue before deciding on the course of action it takes.
Not anymore, Richard Davis, U.S. Bancorp chairman, president and CEO, told analysts during a Jan. 19 conference call to discuss fourth-quarter earnings.
“I said up until the last (earnings) call that we will be a laggard in taking actions … because of our strong position and because we wanted to watch and see what happens to the marketplace,” he said. “I’m going to update that and tell you we’re not going to be a late follower any more. We’re going to be right in the game.”
Sparking his change in direction was the Federal Reserve Board’s decision to propose capping the debit card interchange rate at 12 cents per transaction (
The comment period on the Fed’s proposal ends Feb. 22. JPMorgan Chase & Co. CEO Jamie Dimon expressed similar concerns about the proposal in his talk with analysts about Chase's fourth-quarter earnings, suggesting also that financial institutions' reactions to reduced fees could push more banked consumers out of the banking system (
U.S. Bancorp’s cost per debit transaction is about 40 to 50 basis points, which includes providing the transaction, embossing and other card costs, managing the card relationship and taking on the fraud risk, all aspects that “were not part of the question that the Congress asked the Fed to answer,” Davis said.
“The Fed did a great question job of answering the question they were asked, but the question was wrong and it was incomplete,” he said. “We’re going to go back and ask them to ask a better question.”
Andrew Cecere, vice chairman and chief financial officer, during the call estimated that changes to Regulation E of the Electronic Funds Transfer Act enacted last year will reduce revenue by between $440 million and $480 million (
“We estimate that in 2011 and 2012, our company will recapture approximately half of the revenue lost from the changes in both demand deposit service charges and debit interchange through product feature and pricing changes,” he said.
Sometime in the early or middle part of this year, U.S. Bancorp will initiate actions, “making sure that we have fair pricing for checking products, which are part of what debit includes,” Davis noted.
Davis said he had hoped to wait couple of quarters to watch and learn from everybody else’s reactions. “I no longer want to take that luxury because I think that’s now taking risk,” he said.
Banks will come up with different ways of characterizing the cost of a checking account, all of which will be slightly different variants, Davis said, noting that at the end of the day, debit cards no longer will be a free product.
“There will no longer be rewards to speak of because it’s certainly a loss leader,” he said. “And debit belongs to checking, so checking will now need to have some level of cost recovery to provide the service that we’ve all been providing for years. So I think the paradigm will change quickly. It will be this year, and I don’t think there will be many behind or ahead because it just simply won’t be that long of a window.”
Moreover, the long-term ramifications of branch banking are now in question, Davis added. While one-third of the bank’s 3,000 branches are in corporate sites, universities, airports and grocery stores and make sense based on their cost of operation, the institution will have to rethink traditional brick-and-mortar branches.
“That is the question that the industry should stop and pause to evaluate,” Davis said. “And we won’t have those answers until later this year, when we see both what the competition does and what our consumers are willing” to accept, he said.
The Payment Services unit of U.S. Bancorp reported net income of $272 million for the fourth quarter ended Dec. 31, up 306% from $67 million during the same period a year earlier. Net revenue rose 0.9%, to $1.14 billion from $1.13 billion.
Average credit card loans for the quarter totaled $16.4 billion, essentially unchanged from a year earlier. The unit’s provision for credit losses totaled $206 million, down 32.9% from $307 million, because of lower charge-offs and a reduction in the reserve’s allocation, as the outlook for future losses on the card portfolios moderated, the bank noted in its earnings release.
Noninterest income associated with credit and debit card services totaled $293 million, up 7.3% from $273 million; from corporate payment products, $173 million, up 4.2% from $166 million; from merchant-processing services, $323 million, up 3.5% from $312 million; and from ATM processing, $105 million, up 4% from $101 million.
Credit card issuing charge volume for retail payment services totaled $12.3 billion, up 9.8% from $11.2 billion, and from corporate payment services totaled $11.1 billion, up 9.9% from $10.1 billion
Merchant acquiring volume totaled $65.5 billion, up 7.9% from $60.7 billion. The number of merchant transaction totaled $746.7 million, up 7% from $697.6 million. Debit card transaction volume totaled $11.1 billion, up 12.1% from $9.9 billion.
At the end of December, U.S. Bancorp operated 5,310 ATM, up 3.1% from 5,148 a year earlier. The number of ATM driven totaled 32,887, up 2.8% from 31,992.
As a company, U.S. Bancorp reported net income for the quarter of $974 million, up 61.8% from $602 million a year earlier. Revenue totaled $4.72 billion, up 7.8% from $4.38 billion.
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