The Durbin Amendment was introduced to limit ‘unfair’ debit card interchange fees that were imposed on merchants. The goal of the legislation was to create a more competitive payments environment, which in theory would create lower prices for consumers as
merchants passed on their savings. Banks, understandably, were not so keen on losing this high-margin, fee-based income. Card issuing banks typically earned 1.3% of the total debit transaction, meaning large banks were annually accruing billions in earned
fees. While the legislation intends to reflect the true cost of using debit cards (from the bank’s perspective), there is still the issue of the missing billions from the bottom line going forward.
Many large banks in the US, including Wells Fargo, JPMorgan Chase, and Bank of America, proposed $3 - $5 in monthly fees for debit cards in order to cover the lost revenue. Still others cut loyalty rewards on debit cards to lower the offset in cost-to-income
ratio. These changes were largely met with outrage on the consumer end, the culmination of which was the proposed ‘Bank Transfer Day’ on November 5, when consumers would ditch banks who promised new debit fees for banks that did not. Predictably, most banks
backed down, undoubtedly realizing that losing profitable customers was more expensive than losing their respective fee-based income. But the entire episode is worth considering from a pricing and loyalty perspective.
The challenge of course is identifying the most profitable customers so that the bank can ensure the health of the bank-client relationship. While a bank can easily note the profitability on a given account, in this example, a checking account, and make
a one-time decision to impose a fee or not on the basis of that profitability score, banks cannot often see the value of the entire customer relationship, let alone whether there are other relationships that could also be impacted (as in the case of a family).
For example, a checking account might not be profitable, but the entire web of invisible relationships needs to be considered lest an untimely fee to one account causes the loss of other related accounts as well. An underused, unprofitable checking account
might be one of a dozen financial products and accounts which collectively act as a very valuable relationship.
Quickly bringing a financial product to market in order to capture and manage some of this customer loyalty is a key element in fee-based banking going forward, particularly in the face of future regulations similar to Durbin. The banks that can accurately
measure relationship value across products and create products to capture relationship based information are the banks that will be able to manage their revenues more profitably. A pricing platform that can simulate future product performance through anticipated
pricing changes will be a central component of the model bank of the future.