This week, the Economist released an article suggesting that the United States and Europe are not yet even midway through the housing crisis. Properties are still dramatically overvalued in many regions, and in others customers are still too debt-adverse to consider borrowing. Meanwhile, on the non-interest revenue side, regulations are attacking key revenue streams in nearly all markets. The graphic to the left shows the steep decline in overdraft fees at U.S. since 2008–roughly $3billion per quarter in lost revenue. The recent flogging of big American banks that attempted to introduce fees for debit cards, only to be beaten back by the government and angry consumers, signaled how difficult the road will be to regain revenue through fees—especially as the great financial crisis lingers.

The financial world thinks in cycles. Bubbles burst, and new bubbles form; growth slows, but then returns. But with the signs pointing to this being the “new normal” for revenue, we believe it is time for banks to think seriously about non-traditional, sustainable revenue sources. Fees—however attractive as quick solutions for revenue struggles—will likely prove little more than temporary fixes to eke out revenue from increasingly savvy customers. The real challenge for banks lies not in recovering the record revenues of the last decade. It is to reduce the cost of delivery while improving customer relationships.

To that end, CFC has launched two new initiatives. First, later this month, we will host a webinar on product innovation from around the world (click here if you are in the Asia-Pacific region), to highlight how leading institutions are using a combination of traditional products and new technologies to build more powerful value propositions for their customers. Second, we believe social media will play a crucial role in the future of customer relationships, and remains an underutilized tool for both reducing cost to serve and meeting customers on their terms. Our new Social Media Center provides a roadmap for how revenue and social media can be linked.

This past Saturday marked the official implementation of the Durbin Amendment to limit debit card swipe fees. Big banks (over $10 billion in assets) will now see their fee revenue from each card swipe cut in half – down to 24 cents from 44 cents – in a move that is expected to cost the industry $6.6 billion a year in lost revenue.

To offset losses, many banks have eliminated or scaled back debit-rewards programs, raised minimum balance requirements for customers to avoid certain fees, and added monthly fees for checking accounts. In 2009, 96% of banks with $50 billion or more offered free checking and just two years later, 34% do. In the latest wave of adjustments, banks are now beginning to charge a monthly fee for debit card usage. Bank of America announced last week that it will charge customers a $5 monthly fee to use their debit cards and several other banks are following the trend. Wells Fargo and Chase are testing $3 monthly debit card fees, Regions Financial plans to start charging a $4 fee next month, and SunTrust is charging a $5 fee.

All of these recent changes prompt us to think about what comes next, the remaining questions and possibilities that stem from this regulatory web. Here are a few:

• The customer’s response: Facebook statuses, blogs, and twitter feeds are ablaze with chatter in reaction to Bank of America’s new fee announcement. Banks need to keep in mind that throughout this process of reconfiguring revenue models, they must also keep the customer in mind. Banks should communicate changes clearly and engage their customers in the processes to prevent quick-fire attrition.
• The return to credit: The trend over the last several years has been the use of debit cards over credit cards, due to the need and desire to curb spending and avoid interest rates and fees. The new checking account and debit card fees as a result of Durbin could prompt customers to return to credit cards.
• Customer migration to community banks and credit unions: Banks that hold less than $10 billion in assets are exempt from the interchange fee reduction, as well as other regulations, and because of this have not been undergoing the same product and pricing changes as big banks. Expect to see these banks tailor offers to customers recently hit with new fees.

Stay on top of the latest news on Durbin and other financial regulations by visiting our Financial Regulatory Reform Resource Center.

While the economic downturn and regulatory pressures have forced some banks to eliminate their debit card rewards programs, Ally has found a way to continue to offer rewards, but at a lower cost. Ally’s model demonstrates that it is possible for banks to cut costs while maintaining a high level of customer service.

Ally Bank, an online-only provider, has replaced traditional rewards with a new program, Ally Perks. Ally partners with retailers to offer the program – customers make qualifying purchases using an Ally Checking Debit Card in-store or online at one of the participating vendors and automatically receive money deposited into their Ally account. Customers do not need to sign up for the perks – they qualify by using their card at any of the participating retailers which include iTunes, Target, Lowe’s, and Barnes & Noble.

With this program, Ally offers customers an easy and automatic way to receive rewards by using their debit card – no hassle of tracking points or cutting coupons, customers receive their perks directly into their accounts simply by conducting their everyday purchases. Ally benefits in that it saves time and money by offering a program that is run by the merchants, and the bank collects a percentage of the revenue at the end of the transaction.

The future of debit card rewards doesn’t have to be bleak. Banks can find creative ways to keep offering programs that satisfy customers and save them money at the same time.

Read about new and innovative products by browsing our Global Product Innovation Library. Then visit our Deposit Products Topic Center to learn about optimally pricing checking products and emerging payment trends.

Banks looking to restore consumer confidence will need to focus on products most relevant to current customer needs. However, in a time of increased regulatory reform and mounting cost pressures, banks are being challenged to innovate in creative, yet cost-effective ways. The key for banks is not to spend money on developing new products – rather – spend time on redesigning tools and existing products to address consumers’ most basic financial needs.

Areas such as financial literacy, budgeting and saving, and access to credit are examples of the seven consumer banking product trends that the Council highlights in our Product Resource Center. As banks consider product innovation – we offer key concepts and trends for banks to use as they envision new product design. Each trend is accompanied by illustrative examples that demonstrate how best practices institutions are meeting basic consumer needs with simple products.

Access our Resource Center to learn more about the top consumer banking product trends, then visit our Global Product Innovation Library to view profiles of new and interesting products introduced by financial institutions around the world.

The downgrade of United States debt and continued sovereign debt woes in Europe hit bank indexes hard on Monday. European bank stocks ended the day down over 3.5%, while SNL’s U.S. Bank index fell by 11%. The sell-off continued in Asia on Tuesday, as the Nikkei dropped more than 4% and Australia’s S&P/ASX 200 continued its sharp decline. Some of the world’s biggest names—like BNP Paribas and Bank of America—experienced major loses. Meanwhile, Bloomberg News published a story projecting workforce reductions at the biggest banks to top 100,000 in 2011.

Fortunately, many of Monday’s loses were later offset, but the point was made: the global financial system remains fragile and the memory of 2008 is fresh. The current shock is not a total systemic malfunction like the sub-prime crisis. But it reveals that confidence, trust, and transparency are still at the heart of financial matters, and, unfortunately, still lacking.

Until confidence stabilizes, banks must plan on an age of cost reduction. For an industry where cost and profit rose almost unchecked for the last decade, the new landscape will pose significant challenges:

• Most developed markets have relied on expensive branch footprint growth to drive overall growth, but few have taken steps to rationalize branch networks according to economics and demand;
• Even in the current low revenue environment, most banks are dependent on lofty goals for branch-based sales, and still counting on household lending to drive growth, even as signs point to debt-aversion among consumers.

The challenge facing banks is to confront current economic realities from within business models that have been profitable for years. How does an industry that has experienced almost nothing but growth prepare itself for cost reduction–and win the competitive battles that will form along these lines? CFC is building the solutions necessary to help our members address unprecedented challenges.

How we can help now:

Rethinking Retail Channel Strategy: The first step to reappraising revenue and cost models is an honest assessment of where the industry stands and potential courses of action.

Sustainable Cost Reduction Support Center: As our members look for tactics on creating sustainable cost reductions, we offer studies and cases ranging from solutions in channels to service to sales process efficiency.

Strategies for Customer Demand-Driven Branch Closings: Is it possible to close branches without alienating customers or sacrificing revenue? This webinar explores 10 steps to achieving sustainable branch network cost reduction.

The Consumer Financial Protection Bureau (CFPB), the agency established under the Dodd-Frank Act tasked with regulating credit cards, savings, payment, and other consumer financial products and services, officially opened its doors last Thursday with a new mandate and a new leader. President Obama nominated Richard Cordray, former Ohio Attorney General to lead the CFPB – passing over Elizabeth Warren, the special advisor tasked with setting up the agency, in fear of Warren’s unlikely Senate confirmation. The Senate must confirm a director before the bureau can issue new rules and regulate non-bank financial service providers, such as payday lenders.

Why it matters for you: The CFPB is one of the most controversial components of the Dodd-Frank act. The agency has the ability to write new consumer-protection rules, enforce more than a dozen existing federal consumer-finance laws, dispatch examiners to review banks’ books and records, and investigate consumers’ complaints. Dodd-Frank reforms will also place a considerable amount of demand on bank resources and workflow. It requires over 400 new rules, reports, and studies to be implemented, 72 of which come from the CFPB alone. In our recent whitepaper – research based on interviews with 30 industry executives and experts – we found that most retail bank executives believe that the Bureau will have a negative impact on the financial services industry, and 67% say the Dodd-Frank reforms are receiving high attention within their organization.

How we can help: The Council is committed to delivering relevant, regularly updated material tracking the progress of the CFPB and wider financial regulatory reform through our research and resource centers.

• Visit the Financial Regulatory Reform Resource Center this week for a special CFPB edition
• Read our whitepaper (March 2011), Consumer Financial Protection Bureau: Observations, Challenges, and Opportunities
• Learn about competing effectively amid regulatory uncertainty through our full study, The Regulation Opportunity

Recent financial regulation in the form of the Durbin Amendment and Regulation-E has prompted big banks to consider changes to their checking offerings and in most cases, impose new monthly account charges to checking accounts. A recent survey of the top 25 banks showed that the average monthly fee is now $4 and it could rise to $8 within a year.

Customers don’t like fees. And they especially don’t like new fees to existing accounts. When asked how they would react if they were charged a $3 monthly fee for their debit card, 61% of debit card holders said they’d find another way to pay. For many customers, “finding another way to pay” means leaving their banks. 4 million customers left the biggest 30 banks last year because of fees and an additional 11 million are expected to leave this year. Where do they go?

For more and more Americans, switching to prepaid cards is the chosen path. According to some analysts, prepaid charges will exceed $200 billion by 2013, up from $28 billion in 2009. Customers are attracted to the prepaid option because of easier approval processes, online bill pay, direct deposit, and no minimum balances. Issuers that waive withdrawal and deposit fees are even more popular. For banks, the options for this product are easily customizable and perhaps most importantly, out of bounds for regulators – prepaid cards exempt from the new cap on swipe fees.

The market is ripe for prepaid cards. However, banks are conspicuously absent from the game. Of the 25 highest rated prepaid card options, only one belongs to a bank (CapitalOne). Other players like Walmart, Green Dot, and NetSpend are dominating the field. American Express has recently introduced the launch of its prepaid card option which it guarantees to be “a cut above the rest,” and many analysts and consumer groups agree. In light of all the recent regulatory and cost pressures facing the industry, prepaid seems to be an attractive pursuit for banks.

To learn more about prepaid cards and other innovative products, visit our Global Product Innovation Library.   

Attend our upcoming webinar to learn how banks must develop and implement new product and pricing strategies to restore overall checking account profitability while maintaining or growing market share.

Sources: Fortune, Detroit Free Press, CreditCards.com

Regulatory and cost pressures on revenue are forcing banks to rethink their product offerings. Financial institutions now know the final Federal Reserve ruling on debit card “swipe-fees” and can anticipate the potential multi-billion dollar loss to the industry as a result of the new rule, which goes into effect October 1^st. Banks must also account for the cost of the branch network and rising technology needs. In this current environment, firms need to react quickly to ensure their product choices remain relevant and attractive.

The Council on Financial Competition is committed to helping you stay ahead of the curve by offering a number of regularly updated resource and research topic centers.

• Learn about new and innovative deposit products showcased in our Global Product Innovation Library.
• Track new deposit product trends and learn how to optimally price checking products through our Deposits Topic Center.
• Understand emerging technological shifts for consumer banking and prepare for new customer expectations and new competitors by reading our recent research study.

On Wednesday, banks will finally have their definitive ruling on the debit-card swipe fee, the “Durbin Amendment,” which will take effect on July 21st — 22 days away. It’s been three weeks since the Senate rejected delaying the regulation, and now the industry waits on a final ruling that could cost it as much as $20 billion annually. Where are we now? What’s been done across the industry so far? What can we expect to see moving forward? These are questions that the Council plans to address throughout this period of uncertainty.

The dust has yet to settle on this issue. The Federal Reserve Board will meet on Wednesday to issue its final rules pertaining to Durbin and the ultimate fee cap that will become industry standard. Many analysts predict that the cap could be raised as high as 20 cents per transaction, a significant improvement from the previously mandated 12-cent cap. While this would still be far short of the current industry average charge of 44 cents – it’s relatively good news for banks who may be feeling like regulatory punching bags as of late.

Realizing the need for action to recoup revenue losses, some banks are considering various new fees. Monthly fees for debit card use and checking accounts and the elimination of debit-card reward programs are the most widely discussed first steps to tackling this potential $20 billion revenue loss. SunTrust Bank is the latest to introduce new account fees and end its long-time “no-strings-attached” free checking account. Bank of America is testing a new lineup of accounts that come with fees ranging from $6 to $25, depending on the level of service selected. JPMorgan Chase (like PNC and Wells Fargo) has recently announced the elimination of its debit card rewards program and has begun to test a $3/month debit card fee in Wisconsin.

In perhaps the biggest repercussion yet, London-based HSBC revealed to investors that it will exit the U.S. card market, selling its $33 billion portfolio—a sign of the potential implications of the Durbin amendment on international banks.

Expect to see similar modifications moving forward.  Also expect to see a push toward prepaid cards – as they are not tied to checking accounts, they are exempt from the new cap on swipe fees. American Express has been making headlines recently with its prepaid offer, which it claims is a cut above the rest. The offer boasts no activation fees, and it’s free if you buy it online.

These changes are a mere handful in the larger industry landscape. Keep up-to-date with regulatory headlines and events with our Financial Regulatory Reform Resource Center.

Sources: USA Today, Dow Jones Business Journal, South Florida Sun-Sentinel, TowerGroup

Confronted with intense and sustained regulatory uncertainty, the banking industry has spent much of the last 24 months in a period of “muddling along”. Rather than guess early or guess wrong on any of the big issues, that will mean big change, most institutions have decided not to “guess” at all – let someone else be the “first mover”, let someone else take all the risks.

Yet today, with the much anticipated Consumer Financial Protection Bureau (CFPB) established, and the Senate having rejected another proposed delay on debit card fees, the grid lines of change seem clearer than ever before. The lobbying effort will of course continue, but based on the seismic shifts we’ve already seen, key questions emerge: Where will we turn for revenue? Can innovation and regulation co-exist? What are the principles that should drive our business in an age of regulation?

How We Can Help:

As members think through these difficult questions, the Council has assembled, and will be continue to update, a range of decision support materials, including:

• A Wolf in Sheep’s Clothing? Managing Risk with a Compliance Mentality – From our sister company, TowerGroup, this webinar explores how firms can overcome the challenges of managing both risk and compliance while simultaneously advancing strategic objectives.
• The Regulation Opportunity: Competing Effectively Amidst Regulatory Uncertainty— This brief thought piece articulates a likely trajectory of change based on what The Council sees as the four principal drivers of reform.
• Consumer Financial Protection Bureau: Observations, Challenges and Opportunities – Based on 40 interviews with senior executives, this White Paper drills down on the much anticipated CFPB, exploring likely areas of focus,  expected impact on FS firms and consumers, and how leading institutions plan to respond.  
• Reg E Overdraft Opt-in: The First 100 Days (and Beyond) – This TowerGroup study explores what steps, and what success, banks have had in seeking to regain fees, and what new issues have surfaced on overdraft coverage.
• Financial Regulatory Reform Resources – Updated weekly, this resource center provides an overview of all the latest regulatory developments worldwide.