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Free Checking and Debit Incentives Post-Durbin
Free checking and debit card incentives are here to stay regardless of what happens with the Durbin Amendment because both continue to make sense for banks. by BOB GILTNER
Mar 24, 2011  |  2 Comments

Watch out for the herd mentality. In the face of possible regulatory changes from the Durbin Amendment, many financial institution (FI) executives seem to be bracing for the end: the end of free checking and the end of debit card incentives. Clearly, this is a knee jerk reaction because free checking and debit incentives are here to stay.

Before you hastily follow the behavior of the herd, take a moment to review the facts regarding the impact of Durbin as it applies to total demand deposit account (DDA) revenue at your FI.

Fact No. 1: Net interchange revenue, the focus of Durbin, is only about 15% of the total revenue of the average DDA.

According to 2010 Federal Deposit Insurance Corp. (FDIC) data, this works out to be about $37 per account (142 average transactions a year for all DDAs multiplied by 26 cents average revenue per transaction). Now, divide your total service charges on deposits by your FI’s DDAs. The industry average is about $209 ($151 in nonsufficient funds or NSF revenue, $37 in interchange and $21 in other fees).

Your DDA revenue “spread,” based on match-maturity pricing of five-year money compared to the interest costs of DDAs (the average DDA has a five-year life), generates about $40 in revenue per year, which when added to the $209 in fee income yields about $249 in revenue per year for the average checking account. On average, net interchange revenue per account of $37 is about 15% of the total revenue of $249.

So, even if all interchange revenue goes away, the loss is equal to about $3 per month per account.

Fact No. 2: On average, 85% of revenue per account is directly related to debit card use.

The most significant financial innovation in the last 30 years is the growth and adoption of the debit card and it has been to the FI’s benefit. Debit card swipes reflect an FI’s status as a consumer’s primary financial institution, since debit swipes reflect the account a consumer is actually using. As a result, relationships per household and retention ratios increase with debit card use, as well as all other sources of revenue such as foreign ATM fees, NSF fees, lost card fees and research fees.

A lot more is at stake beyond interchange revenue if Durbin comes to pass. Even after Durbin, FIs will not want to lose transactions to other payment providers and will find it very profitable to incent debit card usage, which will increase revenue, relationships and retention. Most importantly, studies show that small incentives are very effective in increasing debit card use and total DDA revenues.

Fact No. 3: Personal Identification Number (PIN) transactions are as profitable, or more so, than signature debit transactions and experience substantially less fraud losses.

The industry has perpetrated the myth that PIN debit transactions are substantially less profitable than signature transactions because only interchange is considered. In fact, while interchange is less on a PIN transaction, total DDA revenue per PIN transaction is higher than for signature transactions. For example, according to FDIC analysis, the average PIN transaction generates about 16 cents in revenue. However, 2% of PIN transactions on average generate an increase in NSFs, adding 60 cents per transaction (2% x $30 average fee) and eight cents in foreign ATM fees.

A signature transaction generates about half the level of other fees. So even though it earns 33 cents in interchange, the average total revenue for signature debit at most FIs is less than for an average PIN transaction. Those banks that eschew debit transactions if Durbin comes to pass will find that they lose far more in revenue and relationships than they will in interchange income.

Fact No. 4: Free checking is here to stay.

In keeping existing customers and transactions and attracting new ones, “free” checking (defined as an account with no maintenance fees) is highly valued by consumers. FIs that have announced the end of free checking have already begun to lose market share by all accounts. According to the March issue of US Banker, TCF Financial Corp. lost 250,000 of 1.5 million checking accounts in six months after it ended free checking. FIs that do away with free checking will be sending customers to competitors.

In analyzing your revenue, you will see that only a small portion of DDA revenue comes from maintenance fees. The marketplace has long demonstrated that consumers are willing to pay some type of fees but they hate maintenance fees. Success has come from charging fees that consumers are most willing to accept, which doesn’t include account maintenance fees. Those who think new package accounts with explicit fees can replace all lost implicit revenues associated with free checking have simply not done the math.

The bottom line is that a bank’s total DDA revenue is driven by debit card usage, with interchange playing only a small role. If the Durbin Amendment is fully implemented, jettisoning free checking and debit card incentives will only harm your revenue and retention.

Mr. Giltner is a chief DDA strategist, for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of profit strategies to community and regional banks and credit unions. He can be reached at bobgiltner@myvelocity.com.



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3/27/2011 11:15 PM


steve topper
3/24/2011 11:46 AM

Excellent article on the value of free checking and how it isn't going away. You did an excellent job of providing the financial facts about the profitability of checking accounts in general and free checking in particular. Hopefully the tide is turning and we'll see more articles on the survival of free checking and less of the doom and gloom articles about it going away. Thanks for taking the time to present the truth.