Many banks are struggling to respond appropriately to changes in debit interchange. Several large institutions have already announced plans to implement a monthly fee for consumers using debit cards. Whether this is a genuine response or a political maneuver still remains to be seen, however, it is clear that the American payments industry will soon undergo further dramatic changes.
In earlier posts, I’ve addressed the importance of maintaining relationships when re-pricing DDA products. But there is an element we haven’t addressed, transparency. Banks make money on debit transactions and lose money on ACH/check clearing transactions. We might be better served by charging fees for the components of DDA accounts that actually incur expense. Given the continual decline in consumer use of checks, implementing fees only for consumers who write checks might be more palatable for most consumers, but with check volume continuing to decline total revenues would likely be less.
Another response has been proposed by Ron Shevlin, senior analyst with Aite Group, “Banks can recoup a significant percentage of anticipated lost debit interchange revenue by marketing prepaid cards, which carry a higher interchange rate than that proposed for debit cards. This could spare reputational damage resulting from applying new fees to old products.” This approach has a significant advantage. Consumers have continued their shift from credit to debit products, and have shown a desire to do so even in light of increased fees. Rather than shifting to a cash-based economy, à la Dave Ramsey , prepaid cards provide the discipline and convenience consumers seek, while still providing interchange revenue. In fact, a prepaid debit card is really just like a DDA debit card, except for name, higher interchange and lower legal requirements.
The elimination of free checking accounts and institution of monthly fees are also helping to make up for the revenue gap. It is also adding complexity for consumers choosing which account is most appropriate. Even so, the most transparent and competitive approach to setting account pricing is to provide consumers with granular choices that meet the needs of a diverse customer base.
A fascinating statement from Senator Dick Durbin (sponsor of eponymous Durbin Amendment), regarding Bank of America’s proposed fee for debit accounts reflected his disappointment in BofA’s decision to charge for debit transactions. It is hard to believe that he wouldn’t have expected some response from the industry after removing a $5 billion revenue center.
While his intent might have been to reduce consumer expenses, Durbin’s supporters left no doubt that the issue was merchant’s inability to control interchange expenses. In the end, perhaps the cost savings will be passed all of the way down and consumers will win, but in the meantime, merchants received the relief they sought. If we have learned anything from Congress, it is that every bill has unintended consequences.
The following statement by Senator Durbin clearly shows his position on the appropriateness of banks pricing their products to market demand. “It seems that old habits die hard for Bank of America. After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers,” Durbin said in a statement.
If that sounds like sour grapes, try re-reading that quote with a couple of words changed. “It seems that old habits die hard in Congress. After years of raking in excess revenue off an unfair and anti-competitive tax system, Congress is trying to find new ways to pad their pockets by sticking it to its tax-payers.”
Unlike Congress, banks have lived with some level of competition throughout history and will continue to adapt their pricing as we learn how the market responds to each change. Sen. Durbin stated, “Banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works.” This from the Senator who felt debit interchange price fixing was the only way to address the failings of the competitive system. Whether banks responded correctly will be determined by the market in coming months. The performance of the esteemed senator for Illinois will also be judged by the market in coming years. There may be lessons for all of us.