Article

Will banks begin charging debit fees to recover revenue lost from Durbin Amendment?

Analysts say consumers may shift to credit and cash.  

September 20, 2011 by Kim Williams — Reporter, NetWorld Alliance

While many banks have already eliminated debit card reward programs in anticipation of the Durbin Amendment's implementation, which is set for Oct. 1, the question remains as to whether or not banks will begin charging fees in order to recover lost revenue.

Now that the implications of the Durbin Amendment are sinking in, banks are responding cautiously to the new economics of debit cards. With interchange revenue streams cut in half, most banks will feel the need to begin charging some kind of fee and dropping rewards on debit cards.

"Banks are all watching each other because there is a first-mover disadvantage in this case," said Ed Lawrence, director of the Debit Marketing Roundtable at Auriemma Consulting Group. "The first-movers to institute debit/checking fees in a given market will experience the most scrutiny and possible attrition, along with negative press; as others follow, customers will have fewer places to move to."

The Durbin Amendment, a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act, applies an interchange fee cap of 21 cents per debit transaction, along with five basis points to be multiplied by the value of the transaction. Issuers can also receive an additional 1-cent per transaction toward the costs of fraud prevention.

According to The Debit Report, a syndicated publication of ACG, banks' caution is warranted: new pricing will put a significant amount of spending "in play." 

Less than 10 percent of debit card holders in the June 2011 survey currently pay a fee for their debit/checking, although another 22 percent have a minimum balance requirement. In the past year, major players, such as Bank of America, have stated that they are testing the introduction of various fee structures in certain markets; others, like Citi, have gone on record saying they have no current plans to institute such fees.

Wells Fargo announced last month that it will test a $3 monthly fee for debit card users starting Oct. 14 in Georgia, New Mexico, Nevada, Washington and Oregon, following a similar test under way by JPMorgan Chase in Wisconsin.

The Debit Report survey illustrated how participants are consistent in their dislike of any fees, with most preferring to eliminate reward programs instead.

Lawrence expects most consumers will grumble but pay to keep a debit card, but he believes there will be a group of older consumers who will be content going back to an ATM-only card.

“Debit was the biggest beneficiary of the credit crisis, followed by cash,” said Sam M. Ditzion, CEO of Boston-based payments industry consulting firm Tremont Capital Group. “However, now that consumers may start facing increased fees for using debit, as a result to the Durbin Amendment, we may see a slight but decisive shift toward cash and credit.”

More than one-third of respondents report that their debit card has rewards for usage, and they spend $551 per month on them, compared to $370 for non-reward cardholders.

"Correlation is not causation and higher-spending customers are more likely to acquire a rewards card. Nonetheless, it raises the question of where that incremental spend will go if debit rewards are eliminated," said Dr. Patricia Sahm, managing director at ACG.

Most consumers with debit rewards cards also have credit cards with rewards, Sahm notes. "For these people, it makes logical sense to switch their spending to the rewards credit card and pay the full balance every month. However, there is a segment that doesn't trust their own self-control, and they will tend to stick with debit cards because they're perceived as safe."

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