Mid-Tier Banks and Credit Unions Can Compete and Win in Today’s Credit Card Marketplace

Commissioned and made available by TSYS

Oct. 30, 2011

Click here to download the complete white paper, entitled, “Mid-Tier Banks and Credit Unions Can Compete and Win in Today’s Credit Card Marketplace.”

The combination of the recession and regulatory changes has put severe pressure on revenues and profits of all retail banks and credit unions in the United States. Two regulatory changes will significantly reduce future profits for financial institutions that issue debit cards. The Durbin amendment of the Wall Street Reform and Consumer Protection Act of 2009 (the Dodd-Frank Act) will reduce debit card interchange revenue. Changes to Regulation E (Reg E) will reduce overdraft income.

The Durbin amendment will lower the interchange fees that banks can charge merchants for debit card transactions, but Congress expects that some portion of these reductions will be passed on to consumers. The banks are skeptical that consumers will benefit from the amendment. The expectation is that consumers will ultimately pay higher bank fees and receive fewer debit card reward benefits. Merchants’ profits will increase because the Durbin amendment reduces the fees that merchants pay to the banks to process debit transactions and the merchants will most likely retain this savings. To support this opinion, the banks cite a 2009 report by the Government Accountability Office (GAO) that examined the circumstances after the Reserve Bank of Australia regulated interchange fees in that market. The GAO concluded that Australian retailers did not reduce prices to reflect their reduced interchange fees.

The US Federal Reserve reported that the Dodd-Frank Act would reduce gross annual revenue for US debit card issuers $16-20 billion.

The Federal Reserve Board amended the Electronic Fund Transfer Act (Regulation E) in 2010. The changes prohibit banks from charging overdraft transaction fees for ATM withdrawals or one-time debit card transactions unless the consumer has specifically opted in for this overdraft coverage. The change will reduce industry gross revenues for banks and credit unions by more than $15 billion annually.

All credit unions and retail banks need solutions to compensate for the expected reduction in revenue and profits from their debit card programs caused by the passage of the Durbin amendment and Regulation E. Because smaller institutions, midtier community banks and credit unions with assets less than $10 billion, rely on interchange, overdraft revenue, and miscellaneous fees to fund their business needs, they are the most vulnerable to the reduction in debit revenues likely to be caused by the regulatory changes.

Click here to download the complete white paper, entitled, “Mid-Tier Banks and Credit Unions Can Compete and Win in Today’s Credit Card Marketplace.”

Click here to watch the webinar based on this white paper.

And click here to learn more about TSYS’ payment solution for commercial and regional financial institutions.