Survey Reveals Small-Bank Jitters About Regulation, Fraud, Rapid Change

Many community bankers say their payment revenues are declining, and they are bracing for hits from higher expenses from complying with regulations and from fraud while at the same time trying to ramp up new services such as mobile payments.

The findings come from the Independent Community Bankers of America’s bi-annual Payments Survey. The trade group sent the survey to 7,000 members in June and received 713 responses for a 10.2% response rate.

Thirty percent of respondents said annual gross revenues from their banks’ consumer payment products declined slightly and 9.8% said they declined significantly. Respective figures for 2009 were 15.9% and 1.5%. Some 28% of respondents in the 2011 survey said their consumer payments revenues increased slightly, and 1.9% said they increased significantly. That is down from 2009, when 46.9% of respondents reported a slight increase in consumer payments revenues and 6.8% claimed a significant increase.

Cary Whaley, vice president of payments and technology policy at the Washington, D.C.-based ICBA, said respondents likely figured in higher compliance and fraud expenses when they gave their responses about which way revenues were going. “One of the things that came out loud and clear was regulatory,” Whaley tells Digital Transactions News.

Indeed, when asked to name the top three threats to their banks’ payments strategy, “cost of regulatory compliance” came out on top by far, cited by 77.2% of respondents. Next was “loss of revenue due to regulated debit interchange,” cited by 56.3%, and “constant change, rapid rate of obsolescence,” 40%.

Small banks and credit unions have mostly opposed the Durbin Amendment in 2010’s Dodd-Frank Act, an amendment that imposes debit card interchange price controls on banks with more than $10 billion in assets. The Federal Reserve set a cap of 21 cents plus 0.05% of the transaction for regulated issuers, with another penny possible for fraud control. The cap, effective Oct. 1, is shaving about 45% off big banks’ pre-Durbin debit revenues. While their exemption would seemingly leave small issuers with nothing to complain about, Whaley says community banks fear that Durbin’s new ban on cards accessing only affiliated debit networks and greater transaction-routing freedoms for merchants will enable retailers to send more debit card transactions to networks with lower interchange rates. That could mean less income for small issuers.

“Our concern is that now that it’s the merchant who’s going to decide who’s going to win that transaction, the market forces are going to drive it down to 21 cents or maybe below,” says Whaley. “I think it is going to apply to us because of the exclusivity and routing.”

Debit cards are one of the most important components of small banks’ payment strategies and as of June, 60.1% of the respondents rated their debit card programs as somewhat profitable and 17.8% said they were very profitable.

The Durbin Amendment’s effect on the bottom line is only now beginning, but banks already have felt the pinch of new regulations on overdrafts. Meanwhile, many banks are feeling the pain of fraud. Ninety-two percent of respondents said they have been forced to reissue debit cards, and 61% said their spending for fraud control increased over the past year.

Not surprisingly, bankers are looking for ways to control their rising payment expenses. One way for some might be to dump rewards programs. Only 19% offer such programs, but 77% in that group plan to re-evaluate their programs by 2013.

Small banks, however, are keeping their eyes on new technology and services. While only 14% currently offer mobile payments, that number is up from 6% in 2009. Whaley estimates that the number of customers actually using such services at those banks is probably quite low. Some 47.3% said they plan to offer mobile payments before 2013, and 33.4% plan to offer electronic person-to-person payments. Some 20.7% plan to offer consumer remote deposit capture to consumers by 2013, while 13.8% expect to add prepaid cards.

With less technology capital to play with than big banks, community banks are content to wait to see which technology and systems will win consumers’ favor in the fluid mobile-payments market, according to Whaley. “With community banks, they don’t have time for a do-over,” he says. “A lot of them are looking at the marketplace with their eye on being a fast follower. It reminds me of the bill-payment industry 10, 15 years ago.”