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.

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

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.

Where We Are Now: Last week, the US Senate rejected a proposal for a six-month delay in the Federal Reserve rule to cap debit-card swipe fees. The final tally was 6 votes short of securing the delay which would have prevented the reduction of the average debit card processing fee to 12 cents per transaction, from the current 44 cent average.  Despite the fact that Congress exempts banks holding less than $10 billion in assets from the new rule, banks and regulators alike are quick to point out that the new two-tiered system may prove to be anti-competitive. Across the industry, $20 billion in annual income is on the line.

What Lies Ahead: The fee cap is still not set in stone, and there is still some hope for softening the proposed fee cuts. A final rule is due out within days that will most likely increase the cap – which industry representatives argue was set improperly low by the Federal Reserve last December. Many argue that the Federal Reserve failed to take into account the industry’s costs in developing and maintaining debit payments systems. Many analysts predict the limit could be raised as high as 20 cents per transaction. The final deadline for implementation is set for July 21^st but industry experts are warning that date will not be the end of the battle. Once the final rule is set, it is likely that bankers will continue to pressure the Federal Reserve to change it – to the chagrin of retailers.

Key Questions and Moving Forward: How will banks recoup this potential $20 billion loss?

Near-term: focus is on debit card pricing and checking account options:

• Free checking is still in play, but more often than not, there are conditions that apply i.e. maintaining a monthly minimum balance.
• Debit card rewards are trending towards extinction – Wells Fargo and Chase are leading the pack here.
• ATM fees are still largely unregulated, and some banks are considering increasing ATM fees nationwide and charging extra fees on both sides of the transaction.
• Prepaid cards may emerge as alternatives to checking accounts. Prepaid cards are not tied to checking accounts and so are not subject to the new cap on swipe fees.

Long-term: It’s time to reassess the value proposition

Unlike Regulation E, the Durbin Amendment will impact almost all customers directly as “free services” disappear from the product menu. As changes move through the retail bank, two key issues come to the forefront for every American bank:

• Financial engagement builds confidence and satisfaction: As our Consumer Financial Monitor shows, engagement is more than a marketing issue—it is a sustainable and predictable driver of revenue.
• Rethinking the retail strategy: In the near term, banks have to focus on finding new sources of revenue through new fees, but the reality is that building sustainability will require honest and bold rethinking of how services are delivered and how to provide clear value to customers.

The Council can help you navigate regulatory uncertainty. Check in weekly with our Financial Regulatory Reform Resource Center for top regulatory headlines and events.

Sources: American Banker, New York Times, The Boston Globe

In the last twenty years, the number of FDIC-insured institutions has decreased dramatically – 12,347 in 1990 compared to 6,529 in 2010. Regulation and lingering financial uncertainty have many preparing for an increase in consolidation over the next few years. The likely targets: small banks.

The Challenge: Recent U.S. regulatory reform is the latest challenge facing small banks and according to many experts, will further the consolidation trend across financial services institutions as big banks look to snap up market share. The reform with perhaps the most significant impact in the short term is the Durbin Amendment, which restricts the fees banks charge retailers each time a customer uses their debit card. The Federal Reserve has called for a 12 cent limit on card “swipe-fees” , meaning losses of billions of dollars in revenue. Despite the fact that the Dodd-Frank act exempts banks with less than $10 billion in assets from the rule, community bankers protest that retailers will inevitably refuse to accept cards issued by their institutions that will still carry the higher fees.

The Impact: A recent press release from the Electronic Payments Coalitions shares that “nine out of ten community banks said that they would be required to charge customers for services that are currently free,” including debit cards and checking accounts. This is compounded by the fact that many Americans claim that they would consider switching to a different financial institution if their current account fees increased.

What Now? So what is left for small banks to do? Seemingly the options are innovate or consolidate. The good news is that many small banks are leading the charge on innovation – adapting to the mobile revolution, embracing social media, and tailoring their products and services to fit the needs of their local constituencies. These changes do not go unnoticed by customers. There are bright spots for small banks on the regulatory front as well, as exemption from many of the new liquidity regulations that will hit larger competitors will help smaller banks stay agile.

How We Can Help: The Council has conducted research over the past few months directed at tackling regulatory reform.

-          Keep up to date with financial regulatory news and events by visiting our Financial Regulatory Resource Center.

-          Learn how to compete effectively amid regulatory uncertainty by reading The Regulation Opportunity.

-          Understand how Council members are preparing for the world of the Consumer Financial Protection Bureau.

-          Track innovations in services and channels through our studies on Social Media and Transformative Forces in Retail Banking.

Sources: PRNewswire, Bank Systems & Technology, Federal Reserve Bank of St. Louis, NYT

In recent interviews with more than 40 retail banking executives, 67% shared that the Dodd-Frank reforms are receiving high levels of attention in their organizations. The Consumer Financial Protection Bureau (CFPB) came in second in a ranking of their own top regulatory priorities. Join our upcoming Webinar to learn more.

In just 97 days the Consumer Financial Protection Bureau will be an official government agency. The Bureau has faced no shortage of controversy since its establishment last summer as legislators and lobbying groups repeatedly seek to repeal - or at least limit – its powers. Amidst all of the anxiety around what can be expected from the fledgling agency and how will it affect your business, our research interviews reveal a likely mix of challenges and opportunities. While many executives attribute much of their concern to planning in the face of uncertainty, they also cite real opportunity, namely enhancing the customer experience.

Given the uncertain regulatory environment, it is important to map out potential regulatory outcomes. We look forward to further exploring the challenges and opportunities presented by the CFPB during our CFPB Webinar on May 5^th.