The Durbin Amendment, part of the Dodd-Frank Act, limits the amount banks can charge merchants each time consumers pay with debit cards. The cap is set at 21 cents, plus five basis points multiplied by the value of the transaction. An additional penny can be charged for fraud prevention. For the average $38 debit card transaction, the maximum fee is now roughly 24 cents, nearly half of the previous average swipe fee. Issuers with less than $10 billion in assets are exempt from the standard.
Without question, compliance with the Dodd-Frank Act will take its toll, costing the industry between $3 billion and $5 billion over the next three years. Accenture estimates that the hardest hit financial firms could see profits fall between 20 percent and 30 percent. In fact, an Accenture poll of more than 100 financial industry executives found that nearly half thought their profits would decrease as a result of Dodd-Frank.
As debit card usage grows, the actual impact may be even harsher. Debit cards are now used in 35 percent of noncash payment transactions and have grown more than any other form of noncash payment over the past decade, according to the Federal Reserve Board. Not surprisingly, many banks are looking to recoup the lost debit card revenue by eliminating free checking, charging debit card usage fees or ending debit rewards programs. While some of these moves may succeed in stemming the immediate bleeding, they also risk generating negative publicity and alienating customers.
In the longer term, the way back to profitability is to strategically deepen relationships with customers and drive more products into their pockets. Banks in Europe, for example, have pioneered a customer-centric operating model backed by technology platforms that enable the field force to see the entire relationship of each customer -- from mortgages and brokerage accounts to insurance. Their operating models and supporting technology enable field representatives to quickly identify appropriate products based on an intimate understanding of the customer and price accordingly. These banks are now rolling out this model for their U.S. operations.
In addition, these technology platforms can help banks introduce new capabilities, such as bundling multiple products together at customized prices. This can help boost customer wallet share, which is exactly what banks need to do to offset the revenue losses from the Durbin Amendment. Indeed, the best-run foreign banks provide as many as five products per customer; most U.S. banks typically sell one to two products per customer.
Coordinating a Response
At the tactical level, banks need to approach the interchange fee rules and the larger Dodd-Frank Act in a systematic manner. The law is far too complex and touches too many parts of the enterprise to be handled solely by the compliance unit, general counsel's office or any other single department.
To avoid duplication and minimize costs, some banks have established a regulatory project management office to coordinate the compliance effort. The office serves as a dedicated resource comprised of representatives from operations, technology and all affected lines of business. Rather than establishing multiple offices -- one for the retail credit cards line of business and another for the compliance unit, for instance -- banks should set up a single, centralized office that can reach across silos.
The project management office typically coordinates the analysis of the regulations, communicates key deadlines, plans the compliance effort, tracks progress and manages any changes along the way. It also facilitates agreement among the lines of business over how best to meet the demands of the rules.
To oversee the project managers, some banks also set up a steering committee of senior compliance, operations, technology and business executives who serve as an internal board of directors. The ultimate decision maker, the steering committee resolves issues around the project focus and momentum. It may, for instance, resolve a dispute over which type of technology solution most cost-effectively meets a particular regulatory reporting obligation.
Updating Payment Systems
Outdated tracking systems can be dead weight on compliance efforts. Many banks still rely on aging technology systems, designed to monitor older regulatory schemes, that aren't robust enough for the Durbin Amendment. One financial institution, for example, recently discovered that the system it built several years ago to monitor the Sarbanes-Oxley regulations is unable to track the immensely more complex Dodd-Frank rules.
The Durbin Amendment is one of the most significant and controversial pieces of Dodd-Frank. To meet it head on takes a coordinated and systemic approach. Beyond the compliance effort, which shouldn't be minimized, banks seeking to stay ahead of their competitors should also be rethinking how to replace lost fees with technology-supported revenue-generation strategies.
Juan Pedro Moreno is the global managing director of Accenture core banking services. Samantha Regan is Accenture's North American regulatory risk lead.