Bankers Display Fear and Loathing (of Debit Cards) in Las Vegas

LAS VEGAS – The debit card is dead. Long live the debit card.

That was the silent cry of consumer bankers at an industry conference last week that became part rally, part wake. Far from Occupy Wall Street and the epicenters of Bank Transfer Day, executives rubbed shoulders at the Bellagio, sipping Prosecco and traipsing to afterparties in a bar modeled after a chandelier.

More than 1,100 bankers, regulators, card executives, consultants and vendors gathered for the annual event devoted to the debit card and related products. But all the pizzazz and Vegas glitter couldn't hide the bankers' frustration as they tried desperately to figure out where their debit card strategies all went wrong – and what, if anything, they can do next.

"You're not going to innovate your way out of this ditch that we're in … quickly," Whitney Stewart, a senior vice president at SunTrust Banks Inc., told audience members during a panel discussion on Thursday.

That ditch opened a month ago, when regulations slashing the profitability of banks' debit card operations took effect. One industry attempt at "innovation" had imploded mere hours before the conference began, when Bank of America Corp. scrapped its plan to start charging customers for using their debit cards.

Debit cards may no longer be very profitable for banks, but they remain popular among many customers – so popular that the industry's attempts to start charging for their use drew widespread protests and criticism from politicians including President Obama.

SunTrust this summer became one of the first banks to start charging customers $5 a month for using their debit cards, and Stewart said the effort was largely successful until B of A got involved.

"It was going well. We were selling accounts, existing customers were sticking with us. We never could have anticipated the consumer reaction that came from Bank of America's announcement … or the unfortunate comments our president made, which were uncalled for," Stewart told attendees.

Now that B of A had inadvertently hammered the final nail in the coffin of debit-card fees, bankers at the conference had few answers about what to do next.

B of A executive Laurie Readhead had the unfortunate luck to be scheduled to speak about the bank's "evolving consumer model" on Thursday, two days after her bank backtracked on fees. She persevered, briefly defending B of A's debit-fee effort as "transparent," if not fully thought out.

"We wanted to be clear with our customers that we were looking at rolling out a debit card fee. We did not know yet how we were going to do it, but we wanted to go ahead and put it out there," she said during a presentation at the ATM Debit & Prepaid Forum.

The annual conference was sponsored by American Banker publisher SourceMedia Inc.

But Readhead, who took no questions after her speech and declined interview requests, had few concrete answers about what the industry should do next.

Nor did many others. Robert A. DeAngelis, an executive vice president of KeyCorp's 
community banking operations, warned attendees that efforts to charge customers more for their checking accounts would create a "vicious cycle" and a "payments dark age."

His bank wound up on the right side of the industry's failed debit-fee experiment. Key is one of the larger companies that decided not to charge customers debit card fees, and DeAngelis told American Banker that the bank has now picked up some customers from the bigger banks that did try charging fees.  (He called the evidence "anecdotal" so far and would not quantify the number of customers KeyBank acquired in the past month.)

Other executives at the conference also rejoiced in their larger rivals' misfortune.

"God bless Bank of America for announcing the $5 fee.  It's created an immense opportunity in the marketplace … and we think that will be a very material item over the next couple of years," said Jim Hanisch, an executive vice president of the Co-Op Network, which processes ATM transactions for credit unions. 

The trade group CUNA estimated last week that 650,000 consumers have closed their bank accounts and transferred their money to credit unions – and that was before the Bank Transfer Day on Saturday.

In his presentation Friday, DeAngelis told attendees that Key is focusing on building customer relationships – which is what most in the industry are trying to do. But trying to gain more business from existing customers will not immediately solve the industry's shortfall.

The new regulations will eliminate several billion dollars of the revenue that banks are used to collecting from the debit interchange fees merchants pay. The Federal Reserve Board in June capped those fees at roughly 24 cents per transaction, almost half of the former 44-cent per-transaction average.

The Fed's rules were required by the Durbin amendment to last year's Dodd-Frank financial reform law, sponsored by Senator Richard Durbin, D-Ill. His name was invoked frequently, and rarely lovingly, over the conference's four days.

"The theme that is going to permeate our conference, of course, is Durbin," conference chairman Tony Hayes, a partner at Oliver Wyman, told attendees as a welcome. (Speaking hours after B of A reversed course, Hayes also drew rueful laughs when he nodded at "the actions the industry is taking … in terms of new debit fees, or not.")

DeAngelis compared the Durbin amendment to a "meteor hitting the earth" of the payments industry. MasterCard Inc.'s Leland Englebardt took a familiar, if futile, swipe at the law, telling attendees "We're only 33 days into the new era – of government price-fixing."

Even the merchants who lobbied hard for the Durbin amendment complained about its effects – although their main concerns were far from those expressed by most of the conference's attendees.

"I don't think we gained anything from Durbin … other than we identified an advocate in the Senate," Robert Donovan, U.S. assistant treasurer of McDonald's Corp., told attendees.

The fast-food chain does not expect to pay less in interchange fees as a result of the law and could even pay more per transaction, he said. That's because most McDonald's purchases are small-dollar amounts, which on the old percentage basis typically cost less than the new cap of 24 cents per transaction.

Michael Cook, the treasurer of longtime payments industry adversary Wal-Mart Stores Inc., also cited "some disappointments" with the final law. But his outlook on regulation was much sunnier than that of most bankers at the conference.

"It's a good start for future regulatory reform that will take place in credit as well," Cook said. "There's a lot of shoes to drop yet."