The Boston Consulting Group (BCG) released a report today titled “Global Payments 2011: Winning After the Storm”. The report is particularly relevant given the regulatory actions underway in the U.S. this month (including hearings on the Durbin interchange Amendment, comments on the Federal Reserve Board rules relating to the Durbin Amendment, etc.). The BCG report paints a bleak picture for U.S. banks and consumers.
While the BCG report is a global report, U.S. bankers and financial services professionals are well-served to read the full report, as it provides excellent details about the potential impact some of the regulatory reforms underway in the U.S. will have on consumer banking. The report highlights three main areas of regulation (which BCG refers to as “Great Regulation” items):
- The Credit Card Accountability, Responsibility and Disclosure (“CARD”) Act of 2009,
- Changes to Regulation E (to require customers to “opt in” for debit POS and ATM overdraft protection on DDAs)
- The Durbin Amendment, which enables the Federal Reserve to cap debit card interchange fees.
These three “Great Regulations” were designed with good intentions — to protect consumers. But will the actual impact result in a net benefit to consumers?
Based on BCG’s research, it appears that the regulators may have bit off more than they intended.
According to BCG’s estimates, “as much as $25 billion in annual retail-transaction revenues — about 29 percent of total retail-transaction revenues — will be ‘regulated away’ from U.S. financial institutions as the new guidelines take effect.”
The result is that U.S. banks will need to change the way they do business. And not all the changes will necessarily benefit consumers.
For example, BCG expects that the changes will “signal the end of free checking”. Consumers who have the least money in the bank will be impacted the most, as banks scramble to increase fee revenue lost due to the “Great Regulations”.
Once potential bright spot, at least for the growing prepaid debit card industry, is that prepaid cards are one way that BCG suggests banks can increase or recapture fee revenue. BCG suggests that with prepaid debit cards “fees would be a function of average balances and transaction volume (to maximize spread and interchange revenue) and could include an option to migrate to a limited DDA…. Such a card, combined with online bill payment, could provide a transaction-like account without the branch costs while earning higher than debit-card interchange revenues.”
Any way you look at it, 2011 will be a year of change for the U.S. financial services industry. But then, change isn’t always good.
Do yourself a favor, and check out the BCG Report to see what change is in store for you.