What next for banks after failed debit fee experiment?

November 13, 2011

Banking & Finance, Politics

Dead in a near blink of an eye.

That’s how history will chronicle the big idea banks had for ginning up revenue through a monthly fee to customers for debit-card transactions.

Perhaps you can blame awful timing. Parks in cities across the nation began filling up with protests against Wall Street and the banking system at about the same time the likes of Chase, Wells Fargo, SunTrust and Regions initiated their fees. While the fees didn’t cause the protests, their roll out gave the demonstrators one more grievance and account holders extra aggravation.

The public directed much of its ire at Bank of America, though it had not actually assessed the fees, choosing instead to announce only that it would implement them sometime in 2012. The Charlotte-based banking giant backed off its plans around the same time as the others.

Nothing was random about the timing of the fee assessments from the banks. For the most part, the fees coincided with a Federal Reserve order that banks with over $10 billion in assets accept a halving of so-called interchange fees that merchants pay them for each debit card transaction. Banks accustomed to getting 42 cents to 44 cents a transaction starting Oct. 1 would get from 22 cents to 24 cents.

The banks cited customer “feedback” in eliminating the short-lived fees. “We have heard from our customers and are responding to their feedback by eliminating the monthly fee for CheckCards,” said John Owen, head of Consumer Services for Birmingham-based Regions, which holds the leading market share in Mississippi.

SunTrust, which has Mississippi locations in Olive Branch, Horn Lake and Southhaven, said the debit-fee debacle came as a lesson in “responding to client preferences.”

Some homework would have revealed those preferences ahead of time and pointed to the likelihood of a backlash, noted Brandon Roberts, president of Canton-based banking research firm Premier Insights.

“I have to say I am really surprised. It seems to me this is something they would know or would have to had at least some inkling that customers would resent additional fees,” he said in a email response to questions about the rise and fall of the debit card charges.

Roberts said he would have urged the banks to do both surveys and focus groups ahead of time. “The surveys to quantify what the impact would be and the focus groups to drill down and determine how the mitigate the damage.”

So now what?

An official at the American Bankers Association said what comes next is an open question. “When and where I don’t know,” said the official, who asked not to be named. “They will need to make up the revenues somehow. And they can’t wait very long.”

Roberts, whose work includes financial surveys on behalf of banks, said he thinks banks need to continue searching for ways to cut cost and increase revenues. “But I am not sure how urgent it is,” he said.

Raising revenues is the harder half of the equation at the moment, he said. So “you will probably see a lot more cost cutting such as branch closings and reductions in services,” Roberts added.

Seeing layoffs at an increased frequency will indicate “they have been unsuccessful at finding new revenue streams,” he said.

Those streams may include some new ones as well as returning to ones tried previously, said Sonny MacArthur, an audit partner with Atlanta banking services firm Porter Keadle Moore.

Real estate lending is not likely to bring a turn around at the moment. So “reach for different types of lending,” he said.

More banks may join the large banks and specialty banks in lending on “receivables” while others may go back to indirect auto loans, MacArthur said.

“Folks are looking for some other products and services to help drive some growth on the lending side.”

Smaller banks may venture into wealth management and insurance sales, areas they have so far steered clear of, MacArthur added.

On the expense side, three to five banks may join to share back office operations, while other banks may begin offering businesses such services as accounts payable, payroll and benefits management, according to MacArthur.

Re-engineering of branch networks is also likely, he said. That would involve “downsizing the headcount of the branches and implementing a system where everybody in the bank can perform a function…. So maybe instead of 12 people in the branch banks can take it down to six.”

Hans Pettit, a partner in financial institutions services with HORNE CPAs’ Ridgeland office, said he thinks “there definitely was a timing issue” with the ill-fated debit card charges. He added he doesn’t think the fees are dead and buried, however.

“It wouldn’t be surprising to me to see this back in the future” but not in 2012, Pettit said.

In the meantime, as options dwindle banks are likely to turn to consolidation, according to Pettit.

Customer resistance to new charges is “just further pressure” for bankers who face daily challenges on capital ratios, regulatory issues and the difficulties making money through traditional lending, he said.

A banker goes to work each day knowing, Pettit said, that the “easiest way to create shareholder return is to acquire or be acquired.”

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