U.S. Bancorp Will Await Fed’s Actions On Debit And Not Act Now, CEO Says

Richard Davis, the top executive at U.S. Bancorp and chairman of the Financial Services Roundtable, told analysts April 19 it is a toss-up as to whether the Federal Reserve Board would press ahead with its proposed 12-cent cap on debit card interchange.

Meanwhile, Davis has no intention of making customers feel as though they, or their debit relationships, are being held hostage.

“It’s still a 50-50 call on whether or not we’re going to wind up having the kind of severe loss of income that’s currently proposed,” Davis said during U.S. Bancorp’s quarterly conference call.

Asked about his views of fellow industry leader Jamie Dimon’s aggressive criticisms of the Durbin amendment–in his recent letter to shareholders, the JPMorgan Chase & Co. chairman and CEO described the measure as “price fixing at its worst” and warned that the “harm will fall largely on consumers”–Davis said U.S. Bank does “worry about the unintended consequences, but we’re not going to play threat, we’re not going to put our customers in the middle of a dogfight.”

U.S. Bancorp will stand pat until the Fed’s July 21 deadline to finalize some of its rulemaking around interchange, and that the Minneapolis-based company will evaluate its options for recouping revenue if the Fed caps interchange fees below what it costs to provide debit-related services, Davis said.

“Unless and until that happens, we’re going to wait and see,” he said. “We have not decided how we would recover those losses at this point.”

A 12-cent cap would represent no more than “20% to 25% of what the real number is under anybody’s measure” of what it costs banks to cover debit transactions and would put U.S. Bancorp on a “delicate walk between taking care of our shareholders and taking care of our customers,” Davis said.

If the cap goes through as proposed and the bank responds by implementing a new service charge for debit customers, “I won’t make it a threat,” Davis said. “But I won’t make it a secret.”

Dimon’s criticisms of the Durbin amendment have sparked a war of words with its author, Sen. Dick Durbin, D-Ill., who defended the amendment in an April 12 letter to Dimon (see story). The letter suggested that while the measure and the Fed’s proposed rules were “not written the way you wanted,” it “does not mean they were written poorly or that the process that created them was flawed.”

Davis, in contrast, went out of his way to note that the senator’s “intention was good, and his intention was to make sure that customers are not harmed.”

“Had the Fed in their first pass provided an answer that was close to the cost of doing business, … there wouldn’t have been a discussion here,” Davis said.

In the company’s earnings release, Davis said “the economy is slowly recovering” and that he can see that effect in customers’ actions, including higher payment processing transaction volumes and improving credit metrics.

The Payment Services unit of U.S. Bancorp, which includes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit and merchant processing, reported a 159% jump in first quarter net income, to $287 million from $111 million a year earlier, driven primarily by a lower provision of credit losses, the company said in its earnings release.

The unit’s provision for credit losses totaled $162 million, down 65% from $463 million a year earlier, primarily because of lower net charge-offs and a favorable change in the reserve allocation caused by improved loss rates, the company said.

Average credit card loans for the quarter totaled $16.1 billion, down 1.8% from $16.4 billion a year earlier.

Noninterest income associated with credit and debit card services totaled $267 million, up 3.5% from $258 million. Among other payment sectors, corporate payment products income rose 4.2%, to $175 million from $168 million; merchant-processing services income was up 3.1%, to $301 million from $292 million; and ATM processing income rose 6.7%, to $112 million from $105 million.

Credit card issuing charge volume for retail payment and corporate payment services totaled $22.4 billion, up 9.8% from $20.4 billion last year.

Merchant acquiring volume totaled $70 billion, up 10.4% from $63.4 billion. The number of merchant transaction totaled $734.5 million, up 6.1% from $692.2 million. Debit card transaction volume totaled $11 billion, up 12.2% from $9.8 billion.

As a company, U.S. Bancorp reported net income for the quarter of $1.05 billion, up 57% from $669 million a year earlier. Revenue totaled $4.5 billion, up 4.7% from $4.3 billion.

Andrea McKenna Brankin contributed to this story.

What do you think about this? Send us your feedback. Click Here.