How Banks’ PR Fiascoes Compromise Their Ability to Recoup Revenue Lost to Durbin

The banks’ defeat on the Durbin Amendment—followed by their hamhanded efforts to recover lost revenue with explicit debit card fees—may have done more than tarnish their image with consumers. It may also have damaged their ability to deploy revenue-generating programs linked to debit cards, according to Beth Robertson, director of payments research at Javelin Strategy & Research and author of a report released this week on how Durbin, the recession, and other factors are changing consumer payments behavior.

Indeed, banks’ public-relations woes are such that fully 70% of consumers surveyed by Javelin said the Durbin Amendment—which placed restrictions on debit card programs, including interchange caps for banks with $10 billion or more in assets—benefits banks. Only 30% said it benefits merchants.

In large part, the fault for this seemingly perverse result lies with the banks, Robertson tells Digital Transactions News. While banks and the card networks worked to get their point of view across in 2010 when the Congressional battle raged over Durbin—and over what became the Dodd-Frank Act, the law of which Durbin is a part—too much of this effort was directed at industry and political insiders rather than at the public, she says. “So much of that was industry press, not consumer press,” she says. “The message did not get out to consumers.”

As a result, big debit card issuers now must pay a heavy penalty, Robertson says. They must find a way to compensate for the approximately 45% cut in debit card revenue Durbin’s interchange cap has cost them while at the same time confronting cardholders angered about the prospect of debit card fees. With the cap having taken effect Oct. 1, the law has already cost Bank of America Corp. and a handful of other major banks some $1.1 billion in the fourth quarter alone. “They really have an uphill battle now,” Robertson says. “They need to find new revenue to replace lost revenue.”

The furious reaction in October to a plan by BofA to charge some cardholders $5 for each month in which they use their cards forced the money-center bank to back off and only exacerbated banks’ problems. “They now face a battle to implement [fees] without causing further consternation and negativity among consumers,” Robertson notes.

The reaction by BofA, Robertson says, did not help the bank. Its communication, she says, failed to explain exactly who would be subject to the fee, leaving the impression the bank intended to impose the levy on all cardholders. “As a customer, you had no clue whether you would be affected or not affected, so you instantly felt negative,” she says. “Everybody thought it applied to them. They needed to message much more thoroughly about why they were introducing the fee and which customers would be affected.”

BofA may have learned its lesson, though, with a new, merchant-funded rewards program it is working on that will return cash to both credit and debit card holders. The bank plans to test the program, called BankAmeriDeals, with employees in three states, Robertson says in a Javelin blog post.

The public-relations firestorm unleashed by the BofA fee fiasco means that most banks are now much more likely either to forgo debit fees or levy them in some less visible way. At the same time, the loss of consumer trust means debit issuers are left in a compromised position with respect to influencing consumer choice of payment methods at a time when a consumer shift to credit and prepaid cards—both of which are largely untouched by Durbin—would benefit banks.

While consumers have been moving away from credit cards in recent years in reaction to the recession, Javelin’s report found that household finances have improved enough that consumers may be ready to start charging again. Some 23% of surveyed consumers reported less ability to pay off credit card debt in 2011, compared to 31% two years earlier.

At the same time, prepaid cards offer a largely virgin market, with 72% of underbanked consumers saying they use cash and only 6% reporting use of prepaid products, according to the report. Here, though, banks may be hindered by a rule adopted by the Federal Reserve when it implemented Durbin. Intended to keep banks from evading Durbin’s restrictions by adding demand-deposit account features to prepaid cards, the rule says transactions on prepaid cards that offer access to the underlying funds by any means other than the card itself would be subject to the interchange cap.

That rule, Robertson says, “put a damper on new products banks were offering. Now there’s less interchange to cover those additional services.”