With No Credit Card Cushion, TCF Sees Debit Card Revenue Drop 51%

Yet another big debit card issuer, TCF Financial Corp., weighed in with results from the first full quarter of Durbin Amendment debit card interchange price controls, and they weren’t pretty. The Wayzata, Minn.-based regional bank said on Tuesday that card revenue fell 51% to $13.6 million in the fourth quarter from $27.7 million in the third. Year-over-year card revenues also declined 51% from $27.6 million in 2010’s fourth quarter.

TCF is the nation’s 15^th-largest debit card issuer, with approximately 800,000 Visa-branded cards outstanding. While far smaller than giants Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co., all three of which last week reported big fourth-quarter hits from the Durbin Amendment, TCF is less diversified and doesn’t issue credit cards. Card revenues accounted for 24% of TCF’s $116.1 million in non-interest income in 2010’s fourth quarter. A year later, that share slipped to 15% of $91.3 million in non-interest income.

Like other banks, TCF is trying to maintain profitability in the wake of Federal Reserve Board regulations implementing the Durbin Amendment debit card price controls in 2010’s Dodd-Frank Act that took effect Oct. 1. Those rules cut interchange for banks with more than $10 billion in assets by more than 40%. TCF said its average interchange rate actually has declined by slightly more than 50%. The bank last year sued the Fed in an attempt to challenge the amendment’s constitutionality, but later dropped the suit. The debit controls followed earlier federal regulations on debit card overdrafts.

Making matters worse for TCF was customer attrition in reaction to recent changes in checking account products and pricing. In a conference call with analysts Tuesday morning, TCF’s normally outspoken chairman and chief executive William A. Cooper essentially shrugged and acknowledged that regulation was a fact of life. Instead, he said the bank is “listening to customers” and working on pricing and deposit accounts that they’ll accept. “We’ve got a laser focus on this area,” he said.

TCF also is cutting costs and trying to grow its specialty lending businesses, including auto lending through a newly acquired subsidiary. The bank dumped its debit card rewards program in the third quarter, resulting in $904,000 in savings from reduced advertising and marketing costs in the fourth quarter versus a year earlier. “As we’ve said in the past, we don’t expect to mitigate Durbin just by finding more fee income on checking accounts,” Cooper said.

BofA and Wells together reported nearly $800 million in revenue lost to the Durbin Amendment in the fourth quarter. JPMorgan Chase said the amendment caused debit revenue to decline by more than $300 million from the third to the fourth quarters, and that it would reduce 2012’s annualized earnings by about $600 million.

In a new report about consumer payment behavior, Javelin Strategy & Research says the debit regulations have transformed market incentives for payments, “creating a confusing environment for consumers.” After years in which banks and merchants both encouraged debit card usage, banks face the possible loss of $12 billion in annual debit interchange and some are trying to compensate by steering customers toward more profitable credit cards. Most merchants, however, have seen debit expenses decline significantly and continue to encourage debit card usage. The major exception is small-ticket merchants, whose debit card costs have actually increased, and some of them are now trying to get consumers to use cash or other less-costly payment options.

“As a result, consumers are facing a bewildering onslaught of mixed messages about which payment option to use,” Javelin said in a news release.

The report says financial institutions lost an opportunity to educate consumers about the new regulations in the fourth quarter and instead attempted to “impose measures that consumers felt were punitive.” (That’s a reference to more fees, including some banks’ ill-fated attempts to charge monthly debit card usage fees.)

“As a result, 70% of consumers believe that recent debit card regulations will actually benefit banks, whereas only 30% believe that the regulations will benefit merchants,” Javelin said. The firm collected data from more than 3,200 consumers for the report.