The US Federal Reserve's plan to limit banks' debit card interchange fee income by more than 30% will send institutions scrambling to make up that lost fee income.
For the first time since 2011, the Fed has proposed changing the amount of money banks with over $10 billion in assets make when consumers use their debit cards, seeking to limit that fee income by over 30%. The proposal comes at an inopportune time for banks when earnings are already under pressure. If it passes, banks will seek to make up that lost revenue, and consumers will bear that cost burden, industry experts told S&P Global Market Intelligence.
"This is just going to squeeze the margins a little more [and] the amount of money they're making," David True, a partner at consulting firm PayGility Advisors, said in an interview.
Frank Schiraldi, a managing director and senior research analyst at Piper Sandler, estimates the proposal could result in a 2% earnings decline for impacted banks.
That income hit will "inevitably lead to increased prices in other services that these banks are providing," James Stevens, partner and co-leader of Troutman Pepper Hamilton Sanders LLP's Financial Services Industry Group, said in an interview.
Those increased costs will fall on consumers, industry experts said.
"We can expect any reduction to debit card interchange to further reduce the availability of free checking products and access to debit cards," said Kristen Larson, of counsel at Ballard Spahr LLP who is focused on consumer financial services and a former in-house counsel at national banks. "With these reductions to debit card interchange fees and attacks on many other deposit account fees under the Biden administration's 'junk fee' agenda, banks will transition free checking accounts to accounts that charge monthly maintenance fees."
Retailers and banks have long fought over interchange fees — what merchants pay to banks when consumers pay with cards — with retailers pushing for them to be lower and banks pushing back. As banks come out swinging against the Fed's proposal, the rise in fraud and the expenses associated with that increase is likely to be one focus of their arguments.
"Fraud has increased greatly since 2009 on debit cards, and that is a significant cost for covered issuers," such as to confirm with cardholders that they made specific transactions, Larson said. "I just don't think that the way the rule has been calculated accounts for all the issuers' costs with running these transactions."
Impact on income
Some banks have already begun estimating the hit.
Regions Financial Corp. is unhappy with the proposal and is bracing for a $100 million decline in interchange fee income annually.
"I don't like the rule at all, but we're going to have to comply," CFO David Turner Jr. said during a conference on Nov. 3. "We're going to have to adapt to overcome, just like we did when Durbin amendment went in."
According to an S&P Global Market Intelligence analysis of banks with at least $10 billion in assets, Regions ranked 12th among banks with the most interchange fee income during the second quarter. At $108.0 million, those fees made up 5.5% of the company's operating revenue and 18.6% of noninterest income.
Popular Inc. ranked 20th on that list, with $48.0 million in interchange fee income in the second quarter, making up 6.9% of its operating revenue and 28.6% of its noninterest income. The Puerto Rico-based bank estimates the Federal Reserve's recent proposal would reduce its fee income by about $3 million per quarter.
Interchange fees made up a median of 2.7% of operating revenue at banks with at least $10 billion in assets at June 30. But some banks depend on that fee income more than others and would be hit harder by the Fed's proposal.
American Express Co. was most reliant on interchange fees in the second quarter, with this category making up 59.3% of its operating revenue, well above the bank in second place, Capital One Financial Corp., which had 13.5% of its operating revenue concentrated in interchange fees.
Interchange fees made up a higher proportion of American Express' noninterest income at 74.7% and Capital One's noninterest income 64.6%.
