Many banks used 2011 first quarter earnings reports to detail the impact of an upcoming regulatory decision. The Federal Reserve plans to lower the fees that banks can charge merchants for the use of debit cards by its customers, and if the plan is implemented, banks will lose a lucrative revenue source.
TUTORIAL: What To Know About Credit Cards

Dodd Frank Act
The Dodd Frank Wall Street Reform and Consumer Protection Act mandated a sweeping regulatory reform of the industry, along with other changes that impact companies involved in financial services. The companies impacted by these changes have been lobbying hard to influence the regulatory impact of this new law, with $27 million spent in the first quarter of 2011, according to the Wall Street Journal.

Durbin Amendment
One part of the Dodd Frank Act, known as the Durbin Amendment, regulates debit card interchange fees that are set by payment card networks and paid by merchants to card issuers for each transaction. The amendment requires that the interchange fees must be reasonable and proportional to the cost incurred by the card issuer for the transaction.

The Federal Reserve is in the midst of writing the regulations to implement this change and released preliminary rules in December 2010 that would cap fees at 12 cents per transaction with an exemption for banks with less than $10 billion in assets. The proposed regulation would also require banks to offer merchants the use of competing networks to use for processing transactions.

The industry would take a significant hit on revenue from these fees, as a study by the Federal Reserve found that the average interchange fee is $44 cents per transaction. The Federal Reserve originally set a deadline of April 21, 2011 for a final rule, but recently extended the deadline to July 21, 2011.

How Much?
Estimates vary for how much the industry collectively would lose in revenues from the 12-cent cap. A study by said that interchange fees might decrease by as much as $14.1 billion, while the Boston Consulting Group reported in its study that payments to the industry from retail transactions would decrease by $25 billion due to this and other regulatory changes implemented in the United States.

Banks argue that the proposed fees are not consistent with the true cost of each transaction because it doesn't reflect fraud and security costs. Also, banks argue that consumers may be hurt as the change may force some banks to end free checking or impose other fees to make up for the lost revenue.

Company Commentary
Regions Financial (NYSE:RF) reported in its first quarter of 2011 earnings release that the company derived $346 million in interchange fees in 2010, and said that the potential effect from the proposed changes might be "significant."

PNC Financial Services Group (NYSE:PNC) said that the bank would lose $400 million in revenues in 2011 from the interchange fee reduction and another change related to overdraft fees. (For related reading, see Bank Overdraft Changes: What You Need To Know.)

Huntington Bancshares (Nasdaq:HBAN) reported that if the proposed rules go into effect in July 2011 without any changes, the bank would see a $45 million reduction in Electronic Banking income on the second half of the year.

Wells Fargo (NYSE:WFC) just increased its estimate of the after tax impact of lower debit interchange fees to $325 million per quarter, up from the previous estimate of $250 million.

The Bottom Line
The banking industry is gearing up in opposition to proposed rules from the Federal Reserve that would limit debit card interchange fees received by banks. If implemented without any changes, the rules would have a significant impact on revenue streams for the industry.

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