Banks Not Suffering as Much as Expected from Debit Card Reform

After an analysis of their second-quarter earnings results, consumer bank giants Wells Fargo & Co and Bank of America Corp both recalculated their estimates of expected revenue loss as a result of the Dodd-Frank Financial Reform Act and arrived at a lower figure than initially forecasted.

The revenue hit comes as a result of a provision of Dodd-Frank which caps interchange fees: the amount of money a bank can charge merchants for the processing of transactions made by debit card. Given the task of ensuring that the fees charged for debit-card purchases were “reasonable and proportional” to the cost of processing transactions, the Fed initially proposed a 12-cent cap on swipe fees. The financial industry fought hard against the 12-cent limit, making the argument that banks, at that low rate, had no hope of making up their costs of providing debit card services. That amount was bumped up to 21 cents per transaction when the final ruling was passed, and it is this unexpected increase that has caused the banks to revise their estimates.

Bank of America now projects a loss of $475 million each quarter in swipe fee revenue, which amounts to $1.9 billion each year; less than the previous estimate of a $2 billion annual revenue reduction. These figures do not factor in any measures that Bank of America, which is the largest bank in the United States by assets, is taking to recover some of the lost revenue.

Wells Fargo is anticipating the loss of $250 million quarterly, in contrast to the estimate they made earlier this year of $325 million per quarter.

Despite their better-than-expected losses resulting from the higher cap, banks are still faced with the loss of essentially half of their interchange fee revenue. “…and they are going to look to recoup that,” according to Jaret Seiberg, financial services policy analyst at MF Global Holdings Ltd. “It’s not going to be the doomsday scenario, but it’s still going to be more expensive for the average consumer.”

Moody’s Corp. released a report on the Dodd-Frank rules’ effect on banks that stated, “Most, if not all, of the lost revenue will be made up gradually, probably over a period of several years, through a variety of revenue enhancement measures.”

The majority of banks have already announced new fees and other charges that will be associated with consumer accounts in their efforts to make up for the lost interchange revenue. JPMorgan, for example, sent letters to customers earlier this year informing them that they should expect to lose many of their debit- card rewards programs because of the new rules.