After the debit card debacle following the imposition of the debit interchange fee (proposed by the Durbin Amendment) effective October 1, U.S. banks were working out ways to avoid the related revenue losses. An alternative already seems underway. The banks will now try to push prepaid and credit cards to recover some of their revenue loss, Reuters reported on Thursday, citing bank executives.
At an industry conference, executives of several large banks including SunTrust Banks Inc. (STI - Free Report) , BB&T Corp. (BBT - Free Report) and Fifth Third Bancorp. (FITB - Free Report) said that it is difficult to find a solution to recoup lost revenues as the new federal rules restrict banks’ ability to charge merchants whenever a card is swiped. Probably, increased use of prepaid and credit cards could help them to some extent.
This is not the first attempt by banks to recover their lost revenue under the new debit card rules. Already, several banks, including JPMorgan Chase & Co. (JPM - Free Report) and Wells Fargo & Co. (WFC - Free Report) , imposed debit card usage fees on their customers to evade losses, with many others like Bank of America Corp. (BAC - Free Report) following suit.
However, the intention of shifting the cost onto consumers faced public anger. Finally, after a hostile response from consumers and lawmakers nationwide, these banks were forced to call off their debit card usage fees plans.
On Tuesday, Bank of America dropped its plan to charge a $5 monthly fee on debit card purchases following similar actions by its rival companies.
As the next best resort, the banks are adopting higher account fees and pushing for prepaid and credit cards.
Let’s take a quick look at the core of the matter.
What Are Interchange Fees?
For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (V - Free Report) and Mastercard Incorporated (MA - Free Report) . This charged amount is called interchange fees. On average, banks charge a retailer 44 cents per swipe as interchange fee.
Extent of Revenue Loss
Since October 1, the debit interchange fee provision has capped interchange fees for big banks (with assets of $10 billion or more) at 21 cents per transaction. This represents a decrease of about 52% from the previous average, draining out huge revenues from the industry.
According to the data compiled by Bloomberg Government, the limit on interchange fees may cut the annual revenues of large U.S. banks by as much as $8 billion.
The Fed was desperately looking for a way to stop the large banks from earning super-normal profits in the interest of the people. The idea was to infuse move the money from the banks to the markets through consumers, thereby increasing consumption and ultimately fueling economic growth.
With the imposition of debit card usage fees by banks, the main purpose of slashing interchange fees would have been defeated as the cycle of cost shift would have eventually fallen on consumers’ shoulders. So the dropping of debit card fees is definitely good news for Americans. But what about the revenue losses of banks that are already struggling to stay profitable with weak financials?
The banks are hopeful that if successfully popularized, prepaid and credit cards will provide some oxygen to the banks.