NEW YORK/CHARLOTTE, North Carolina (Reuters) - Banks may be crying wolf over lost debit card processing fee revenues.
Regulators in December proposed a 75 percent cut in fees that banks and card networks charge merchants to process debit card transactions.
The banking industry — which shares these fees with card processing networks such as Visa Inc and MasterCard Inc — was quick to say that the fee limits were draconian and warned of dire consequences.
But banks have multiple ways to make up for the lost fees, including adding new fees to accounts and discontinuing rewards programs for debit cards, analysts said. Banks can also offer prepaid debit cards, which are exempt from restrictions on processing fees.
“Banks are highly, highly innovative when it comes to developing new revenue streams. When one door closes, two others open — I’m sure that’s going to be the same for debit,” said Philip Philliou, a partner at the payments consulting firm Philliou Selwanes and a former executive at MasterCard Inc and American Express Co.
Much is at stake. If banks successfully lobby to tone the rule down, they will likely be emboldened to push back on other elements of the Dodd-Frank financial reform bill, which originally called for debit fee limits.
Behind the scenes, many industry executives are furiously lobbying the government to ease the rules, warning that consumers will bear the burden of debit fee cutbacks.
Jamie Dimon, chief executive of JPMorgan Chase & Co, warned in January that fee limits would mean that banks could no longer afford to serve as many customers. As many as 5 percent of Americans might no longer be able to afford checking accounts as banks start charging more upfront, he said.
The Boston Consulting Group estimated the total cost of the Dodd-Frank law to U.S. bank card processing fee revenue to be up to $9 billion, in a study published on Tuesday.
That figure would rise to $25 billion if earlier regulatory changes — among them the discontinuation of banks’ automatic checking overdraft-protection policies — were added in, Boston Consulting said.
Consumer advocates are skeptical of banks’ complaints.
“It’s extremely common for the banks to claim the world is going to end and to blame it on the regulators,” said Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group.
“The banks never served the lowest-income consumers without being pushed to do so,” he said, adding that he thinks it more likely that banks will cut back on debit card rewards and other perks instead of broadly adding fees.
Banks largely fund debit rewards programs from their processing fee revenues. JPMorgan Chase is discontinuing its debit rewards program in reaction to the law.
US Bancorp CFO Andrew Cecere told Reuters in an interview last month that the bank may also cut debit reward programs and would rethink the ways it charges customers for checking accounts.
Other banks are likely to follow suit, analysts said.
Adding fees is also possible, said Jim Tierney, chief investment officer of asset management company W.P. Stewart.
Banks could completely replace their lost debit card processing fee revenue by charging customers between $30 to $40 a year for their checking accounts, or between $2.50 and $3.33 per month, he said.
The Boston Consulting Group study said that U.S. payment industry revenues are still likely to grow in 2011, and banks’ card businesses will recover thanks to new technology, products and fees.
Even some banks acknowledge the fee caps can be mitigated.
Bank of America Corp, the largest U.S. bank, said in July that it could lose $1.8 billion to $2.3 billion of annual revenue from debit card fee limits.
But the largest U.S. bank by assets does not expect all of those losses to persist, Chief Financial Officer Charles Noski told Reuters in a recent interview.
“We would expect to recoup some of that over time,” said Noski.
Some banks are also starting to drive consumers toward alternatives that are exempt from the law, including prepaid debit cards. Banks have been slow to get into general-purpose prepaid cards, although Bank of America and others are exploring ways to introduce more of them.
Philliou said he is working with two large U.S. banks “that are adopting prepaid as a supplement to their debit card business, and I know we’re going to see much more, many similar initiatives.”
And there is also the traditional alternative of credit cards, at least for those consumers who can qualify for them.
“In the last two years, the emphasis completely shifted to debit ... but if you change the rules, and you change the revenue potential for each of the cards, I think banks will completely swing back and re-emphasize credit,” said Tierney.
That may already be happening. A report on Monday said that U.S. consumer credit rose by 3.5 percent in December on a seasonally adjusted and annualized basis, the first increase in more than two years.
Reporting by Maria Aspan in New York and Joe Rauch in Charlotte