Banks May Rethink Debit Card Fees, But at What Cost to Consumers?

Strategic Insights -

Banks are likely to lose significant revenue from regulations capping debit card fees, potentially leading to a shift in revenue generation strategies. However, this may result in consumers facing increased costs elsewhere, such as rising fees for consumer loans and killing of free checking accounts. The loss of revenue is estimated to be around $30 billion annually, according to consulting firm Novantas.

Key Takeaways:

  • Banks may need to make up for lost revenue in fees by charging consumers for services previously offered for free, such as consumer loans and overdraft coverage.
  • The Durbin Amendment under Dodd Frank has capped the amount banks can charge retailers for processing debit card transactions to 21 cents, resulting in a significant loss of fee income.
  • The cost of providing a basic checking account is estimated to be $15 to $20 per customer per month, which banks previously offset with fees charged to merchants.
  • Banks are more likely to waive fees for customers with higher balances, who are considered more profitable.
  • Credit unions and community banks may benefit from the shift in strategy, but their economics may not be sustainable in the long run.
  • Customers may need to adapt to less convenient forms of banking, such as self-service kiosks or online banking, to avoid fees.

Statistics:

  • Estimated annual revenue loss for banks from regulations capping debit card fees: $30 billion (Novantas)
  • Estimated cost of providing a basic checking account per customer per month: $15 to $20 (Hank Israel, partner at Novantas)
  • Potential interest spread banks can earn on each account: 75 basis points (Hank Israel, partner at Novantas)
  • Average balance required for a checking account customer to justify the costs of free checking: $24,000 per month (Hank Israel, partner at Novantas)
  • Estimated number of checking account customers at large banks that carry such high balances: a "very small percentage"

Sources:

  • Associated Press report on Saturday
  • Wall Street Journal report
  • Shanthi Bharatwaj, "Banks May Rethink Debit Card Fees, But at What Cost to Consumers?", TheStreet (http://www.thestreet.com)
  • Hank Israel, partner at Novantas
  • Novantas
  • Dodd Frank
  • Durbin Amendment