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POST-DURBIN IMPACTS MARKETING AND PRICING RESPONSE.

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Presentation on theme: "POST-DURBIN IMPACTS MARKETING AND PRICING RESPONSE."— Presentation transcript:

1 POST-DURBIN IMPACTS MARKETING AND PRICING RESPONSE

2 Overview Doreen Kelsey Consulting Services 2012 All Rights Reserved 2  Durbin Amendment positioned by Congress as beneficial to consumers  GAO study concluded that competition has led to increased costs for merchants  Costs of accepting cards is passed along to consumers  Caps on issuer; not on acquirer  Merchant routing can be exclusive  Yet to see impact from multi-homing provision

3 Impact on merchants Doreen Kelsey Consulting Services 2012 All Rights Reserved 3  Merchants overall benefiting from lower costs  Industry experts expect $450 million savings this year  Signature debit transactions much less expensive  PIN debit slightly more expensive  Some merchants seeing much higher costs  $.21 cap morphed into minimum  Primarily affects small-ticket sales such as Red Box  Heartland reports average savings per merchant is $ per $100,000 in card volume

4 Impact on regulated institutions Doreen Kelsey Consulting Services 2012 All Rights Reserved 4  Large banks without major credit card operations had 40% loss in interchange in Q  BOA lost $441million in Q4 debit revenue  Chase lost $263 million in Q4 debit revenue  Wells Fargo lost $337 million in Q4 debit revenue  U.S. Bancorp lost $58 million in Q4 debit revenue  Banks expect annual losses of $6.6 billion in debit revenue  Banks steering customers to credit cards

5 Impact on exempt institutions Doreen Kelsey Consulting Services 2012 All Rights Reserved 5  Slight increase in interchange Q  Few tenths of one percent increase among banks  Many credit unions report similar or greater increase in interchange  Credit unions and community banks experienced growth in membership/customers in Q4  Increase in checking accounts and debit cards led to increased interchange income  But, costs increased due to higher processing costs

6 Impact on card associations Doreen Kelsey Consulting Services 2012 All Rights Reserved 6  Slower growth in debit volume  Regulated institutions promoting credit cards over debit  Unaffiliated network requirement has major implications  Incentives offered to merchants to maintain volume  Pricing changes planned  Visa taking lead with FANF and PAVD  Lowering APF  MasterCard taking similar approach in regard to FANF  Creating uncertainty for issuers

7 Outcomes Doreen Kelsey Consulting Services 2012 All Rights Reserved 7  Regulated institutions eliminated or pared down debit rewards  Regulated institutions increased fees on checking and other services  Customers migrated to exempt institutions  Exempt institutions experiencing increased interchange revenue in many cases  Merchants report no intentions to pass savings along to consumers

8 Discontent all around Doreen Kelsey Consulting Services 2012 All Rights Reserved 8  Merchants dissatisfied; threaten lawsuit  Want certain costs removed from calculation  Claim FRB went beyond Congressional intent  Want cap restored to original proposal  FIs dissatisfied; bill initiated to repeal Durbin  Consumers dissatisfied with banks  Believe that banks benefitted from Durbin  Perceptions based on fee increases

9 Fee increases Doreen Kelsey Consulting Services 2012 All Rights Reserved 9  Regulated institutions striving to make up revenue  Extra $20 per month per account needed  Monthly debit card fees bombed  Meant to shift cardholders to credit and pre-paid  Shifting to less salient fees  Increasing monthly maintenance fees on checking  Card replacement fees ($5-$20)  Remote deposit capture ($.50 per check)  Increase in NSF fees ($40)

10 Reliance on fee income Doreen Kelsey Consulting Services 2012 All Rights Reserved 10  Net interest margins have sharply declined over past two decades  Fee income increasingly important to financial institutions’ bottom lines  Regulatory scrutiny increasingly placed on fee income  Institutions must become more efficient and less reliant on fee income

11 Emerging and continuing threats Doreen Kelsey Consulting Services 2012 All Rights Reserved 11  Pressure from large merchants to reduce interchange costs further  Regulations targeting credit card interchange  Regulations targeting other sources of fee income  Cards becoming obsolete  Increasing adoption of alternative payment systems  Checking accounts becoming obsolete  Assets re-pricing at today’s historically low rates

12 Strategic response Doreen Kelsey Consulting Services 2012 All Rights Reserved 12  Focus on relationships  Loyalty lessens rate and pricing sensitivity  Increases efficiency  Less reliance on back-loaded pricing model  Allows for greater transparency  Seek non-fee sources of non-interest income  Unrelated business income  Mortgage servicing  Insurance services

13 What is efficiency?  Leveraging investments to earn a healthy return  Managing processes, programs, and relationships to earn revenue in excess of costs  Eliminating obsolete processes, programs or products  Managing and improving customer/member relationships  Cross-selling appropriate services  Maximizing balances among services  Maximizing share of wallet 13 Doreen Kelsey Consulting Services 2012 All Rights Reserved

14 How is efficiency measured?  Efficiency ratios measure percentage of income needed to cover non-interest expense  Another way to put it: how much does it cost your organization to earn a dollar?  Lower is better with efficiency ratios  Banks’ efficiency ratios average 55%  Best performing credit unions typically have efficiency ratios in the % range  Smaller credit unions often closer to 90% 14 Doreen Kelsey Consulting Services 2012 All Rights Reserved

15 Why is efficiency important?  Previously, earnings model based on net interest income less operating expenses  Shrinking margins have made industry more dependent on non-interest income  Regulatory changes and emerging payment systems threaten to reduce non-interest income  Higher costs for compliance have increased operating expenses  It’s time to get back to fundamentals 15 Doreen Kelsey Consulting Services 2012 All Rights Reserved

16 How not to drive efficiency  Focusing solely on cost reduction  Relying on price to drive product and balance volume  Promoting product of the month  Focusing only on product profitability instead of household profitability  Focusing only on services sold and not on balances acquired 16 Doreen Kelsey Consulting Services 2012 All Rights Reserved

17 Calculating efficiency ratio Doreen Kelsey Consulting Services 2011 All Rights Reserved 17  Total interest income (line115 on call report)  Plus other operating income (659)  Plus total fee income (131)  Subtotal  Less total interest expense (350)  Equals total adjusted operating income  Divide total non-interest expense (671) by total adjusted operating income = efficiency ratio

18 Back-loaded pricing model Doreen Kelsey Consulting Services 2012 All Rights Reserved 18  Relies on hyperbolic discounting  Consumers fail to consider contingent costs  End up paying more  Banking industry examples  NSF fee income funds free checking  Punitive fees/rates fund credit card rewards  Other industry examples  Airfares  Printers

19 Hyperbolic discounting Doreen Kelsey Consulting Services 2012 All Rights Reserved 19  Major issuer offers 0% balance transfer with promo rate effective for six months  Balance transfer fee is 4%  Post-promo rate is 7.9%  Compare to credit union offering 6.9% balance transfers for life with no balance transfer fee  Cardholder perceives 0% offer as more beneficial  Yet, effective APR of balance transfer is 8%

20 Profitability drivers Doreen Kelsey Consulting Services 2012 All Rights Reserved 20  Drive profitability from cross-sales  Market driven  Customer centric  Organic growth  Convenience and value drive loyalty  Benefits of high loyalty index  Rates and fees rank #10 and #11 on a 20-part survey  Service and convenience rank #2 and #3

21 Benefits of free checking Doreen Kelsey Consulting Services 2012 All Rights Reserved 21  Exemption offers competitive advantage  Use advantage to gain market share  Interchange income eventually needs to be offset by other income  Institutions should not be quick to eliminate free checking  Consumers say they will switch  Many alternatives now exist

22 Leveraging free checking Doreen Kelsey Consulting Services 2012 All Rights Reserved 22  Reduce overdraft fee to increase fee income  Cross-sell credit cards  Interchange not subject to caps  Credit cards offer two revenue streams  Cross-sell additional loan products  Focus on refinancing and balance transfers  Target small business owners not being served by larger institutions  Assist those impacted by financial crisis

23 Market for balances Doreen Kelsey Consulting Services 2012 All Rights Reserved 23  Services increase relationship  Cross-sell services to improve loyalty  But, it’s only half the job needed  Balances increase profits  Market for balances when promoting credit cards  Consumer debt remains at record levels  Household debt 110% of disposable income currently  In % by comparison  Consumers want to deleverage, reduce cost of credit

24 Credit card preferences Doreen Kelsey Consulting Services 2012 All Rights Reserved 24

25 Checking standalone profit Doreen Kelsey Consulting Services 2012 All Rights Reserved 25 Free Checking Standalone Profit Post-Durbin (current interest rates) Pre-Durbin (current interest rates) Yields at historically high interest rates Average balance$2,500 Interest rate0.00% Replacement rate.085% 5.00% Net margin.085% 5.00% Net interest income$2.13 $ Debit interchange$41.76$76.56 Gross income$43.89$78.69$ Account expense$ Net income Return on balance

26 Credit card standalone profit Doreen Kelsey Consulting Services 2012 All Rights Reserved 26 Credit card standalone profit Today’s interest ratesHistorically high interest rates Average card balance$2, Interest rate14.00% Replacement rate0.85%5.00% Loan loss percentage4.98% Net interest margin8.17%4.02% Net interest income$192.40$94.67 Interchange income$65 Gross income$257.40$ Account expense$ Net income$107.40$9.67 Return on balances4.56%0.41%

27 Mobile channels Doreen Kelsey Consulting Services 2012 All Rights Reserved 27  Adoption of mobile banking accelerating  15% of all HHs  34% of credit-driven (young, high income)  Shifting from information to transaction based  Continued foray into payments space by PayPal, Google, Yahoo, Dwolla and more  Industry experts predict cards obsolete in 3-5 years  Checking accounts also may become obsolete

28 Factors driving innovation Doreen Kelsey Consulting Services 2012 All Rights Reserved 28  Mostly about convenience  Customers only need to carry phone (not wallets)  Faster than paying with cash; moves the line  Sales tickets higher than when paying with cash  Combines touch points  Payments, shopping list and loyalty rewards  Payment method and marketing medium all in one  Saves money  Merchants avoid minimum fees on multiple, low value transactions  Merchants will invest in systems that reduce or eliminate interchange fees

29 Doreen Kelsey Consulting Services 2012 All Rights Reserved 29 Doreen Kelsey helps organizations become more strategic and competitive. Doreen Kelsey Consulting P.O. Box 8483, Spokane, WA (800) (509)


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