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The so-called Durbin Amendment that soon will be law could cut Bank of America Corp.’s debit card revenues by up to nearly 80%, the nation’s largest debit card issuer estimates. Two major prepaid card processors that are planning IPOs and rely on growing interchange income, however, seem likely to escape the amendment’s revenue-crimping regulations.
BofA provided the estimate with its second-quarter earnings report Friday. The bank said it expects to earn $2.9 billion in debit card revenues this year. Beginning in the third quarter of 2011, when Federal Reserve debit-interchange regulations called for under the amendment are to take effect, the annualized cut in revenues could be anywhere from $1.8 billion to $2.3 billion, according to a presentation BofA executives reviewed with financial analysts. If those predictions came to pass, BofA is about to lose 62% to 79% of its debit revenue. U.S. Sen. Richard Durbin’s amendment is attached to the financial-reform bill that has passed Congress and awaits President Obama’s signature.
Charlotte, N.C.-based BofA, it should be noted, used the term “revenues” regarding the $2.9 billion figure, not interchange. A spokesperson tells Digital Transactions News by e-mail, however, that “almost all” of that figure is interchange. The $1.8 billion-to-$2.3 billion estimates are only interchange, he adds.
Bank of America didn’t provide much detail about how it arrived at its loss predictions. Durbin’s amendment is rather vague, requiring the Fed to assess what’s “reasonable and proportional” in setting debit card interchange for financial institutions of $10 billion or more in assets. But Patricia Hewitt, director of the Debit Advisory Service at Mercator Advisory Group Inc., says assuming a cut of at least 50% is defensible. “Honestly, we don’t know what the Federal Reserve is going to do or set their rates at, but the financial institutions have to work backward from a worst-case scenario,” she tells Digital Transactions News.
BofA said the size of the hit to its revenues is “before mitigation”—imposition of new income streams or cost cuts to make up for the loss of debit interchange. Press accounts say BofA already is rolling out a new checking account that will be free only for customers who get electronic statements and use ATMs. Other banks will be considering similar ideas as they try to get customers to use the most efficient channels for managing demand-deposit accounts, Hewitt says. “What’s going to happen is we’re going to see a number of different strategies,” she says. “We’re going to see some experimentation.”
Durbin’s amendment has several exemptions. Besides not regulating the interchange rates of banks and credit unions with $10 billion or less in assets, it also exempts prepaid public-sector benefits cards and general-purpose reloadable prepaid cards. That’s good news for two prepaid card processors that are planning initial public offerings—Green Dot Corp., whose stock could begin trading this week, and NetSpend Holdings Inc.
According to its June amended registration statement, Monrovia, Calif.-based Green Dot posted $53.1 million in interchange in fiscal 2009 ended last July, some 23% of $234.8 million in operating revenues. For the three months ended March 31, 2010, interchange amounted to $27.9 million, 30% of $92.8 million in operating revenues. Green Dot says its other operating revenues come from cash transfers and “card revenues,” or fees.
At Austin, Texas-based NetSpend, interchange accounted for 19% of operating revenues in fiscal 2009, some $43.2 million of the $225 million total, according to a July registration statement. That was up from 17% in fiscal 2008, or $31.1 million of $183.2 million in all. NetSpend gets the rest of its operating revenues from service fees.
Visa Inc. and MasterCard Inc. set interchange rates for their branded credit and debit (including prepaid) cards, with the per-transaction fees charged to merchant acquirers and paid to card issuers. Green Dot and NetSpend are not issuers, which implies that they have revenue-sharing agreements with banks that issue the prepaid cards for programs they manage. Green Dot, which plans to buy Utah-based Bonneville Bank, counts Columbus Bank and Trust Co. and General Electric Co.’s GE Money Bank as its current issuing partners. NetSpend’s issuers are MetaBank, Inter National Bank, U.S. Bank, and SunTrust Bank.
Green Dot says that the interchange revenues of it and Bonneville Bank “would be unaffected” by the regulations in the financial-reform bill. But both NetSpend and Green Dot say regulation in other areas could affect their businesses in the future. For example, debit card overdrafts are the subject of separate regulations that will require customer opt-ins this summer. Debit card and checking overdrafts generate about $34 billion a year for banks and credit unions, according to research firm Oliver Wyman (Digital Transactions News, Sept. 23, 2009). NetSpend says non-opt-in overdrafts produced about 6% of its operating revenues in 2009.
Although some opponents have said Durbin, an Illinois Democrat and Senate majority whip, offered his amendment at the behest of Walgreen Co., the big drug-store chain based in suburban Chicago, Durbin said in a recent statement that his amendment will help cut an expense borne by small businesses that produces revenue mainly for large banks. “For years, Visa and MasterCard, and their big-bank backers, have unilaterally fixed prices on the fees small businesses pay every time they accept a debit card from a customer,” he said. “They can impose these prices and say to the local business person: Take it or leave it.”
