LAKE FOREST, Ill.—Service charge revenue—what FIs make from overdrafts and debit and credit card interchange—reached a record-high $84.3 billion in the second quarter of 2016, according to a new study.
The record total shows how far FI fee revenue has bounced back since just after the recession, when it dropped to $69 billion in 2012.
That same study also shows that, overall, bank and CU credit card revenue will soon overtake debit income.
“Our Payment System Study shows significant changes on consumer checking transactions,” said Danielle Martorano, senior analyst at Moebs $ervices, which conducted the report. “The changes measured in both volume and revenue will affect the future design of checking accounts.”
Fed Impacting Volume, Revenue
Martorano explained that the federal government has had a substantial effect on both the volume and revenue of checking account transactions, particularly the Durbin Amendment’s impact on debit income.
“The Durbin Amendment has significantly impacted debit interchange revenue collected by all FIs, falling from about $18 billion in 2011 to $14 billion in 2012,” said Martorano, noting that change has led banks and credit unions to encourage account holders to swipe their debit cards more often. “Since then, the volume of debit card transactions has continued to increase to over 72 billion transactions in 2016, translating to nearly $22 billion in interchange revenue.”
Federal courts, too, have levied hefty fines on multiple banks for overdrafts practices, said Martorano.
“Despite the nearly $2 billion in fines, overdraft revenue has reached $32.4 billion in 2016,” she said. “Several factors can have an effect on both interchange and fee income. Government restrictions and fines can greatly impact service charges—and they have—along with consumer behavior. Both factors need to be considered when deciding which checking account design works best.”
These changes, said Martorano, make it imperative that a financial institution determine if it wants to be in the transaction business or relationship business.
“Credit unions are definitely choosing to be in the transaction business, and banks are choosing to be in the relationship business, evidenced by Wells Fargo Bank, even though they are behaving badly,” said Martorano.
Good news for those looking to focus on transactions is that debit volume is growing quickly, overdraft income is waiting for the economy to get fired up and will take off, and credit card volume is increasing, too, explained Martorano.
Martorano pointed out that credit card income growth has been making up for how government intervention has reduced debit income on a per-swipe basis.
New 'Leader'
Martorano said credit cards have become the “leader” in consumer fees.
“The Card Act went into effect in February of 2010 and created many consumer protections and restrictions on credit cards. However, no restriction was placed on the interchange fee charged by FIs. Without the fee limitation, the growth in credit card volume and increase in interchange fees allowed credit card revenue to increase substantially when compared to the debit card interchange revenue,” she said.
There were 32 billion credit card transactions through Q2 2016, making up $30 billion in revenue, Martorano said.
“While credit card volume is less than half of debit card transactions today, credit card swipes, on average, generate over 30% more in interchange revenue,” said Martorano. “And soon credit card revenue will exceed overdraft revenue.”
Service charges need to be evaluated when creating an overall checking account design, reiterated Martorano.
“Overdraft structure and program design will always be important features to checking accounts and profitability,” said Martorano, adding the importance of adding a mobile app to keep up with consumers’ checking demands. “Now is the time to realign checking and transactions for a profitable 2017.”