Archive for Banking Fees
Banks Targeting Debit Cards for Additional Revenue Stream
Posted by: | CommentsWith the Credit Card Accountability, Responsibility and Disclosure (CARD) Act to be instituted in February 2010, banks are starting to look at other revenue streams, as over the long term revenue from credit cards will be a smaller part of their overall business than in the past.
It isn’t a stretch to understand there’s a lot of potential revenue to be garnered with debit cards, which are a growing and significant tool used by consumers for their daily transactions. According to The Nilson Report, American consumers will spend approximately $1.64 trillion using their debit cards in 2010, a huge increase of about 66 percent from just 2006. Much of that comes from people cutting back on debt purchases and using cash as the preferred method of doing business.
As far as credit cards as an ongoing revenue stream, limitations from CARD, which will limit how lenders will be able to increase interest rates on the cards, as well as fees, has resulted in companies increasing interest rates on credit cards now in order to get back some of their future losses. While this will work for them over the short term, long term credit card revenue will decline as a percentage of their overall business.
How this will play out for debit cards as a revenue stream will be in relationship to loyalty rewards programs.
How the loyalty programs work when offering rewards is they charge a fee to debit card users for the privilege of using their points to buy goods or services.
While this is good for banks and some consumers, let’s face it, most of the time you have to spend so much it doesn’t really pay to enter into the program. Of course for some people it really works well because they indeed to spend into the thousands of dollars a year using their debit cards, and so can recoup a portion of their fees spent to receive the rewards.
In other words, these programs work for people that make a good living and will spend into the tens of thousands of dollars using their debit card, whether there is a reward program or not. A reward program just nudges them to spend a little more, which can generate more revenue for the banks from the fees connected to administrating the program.
To be useful for consumers, they will have to know their spending habits and how much they will use their debit card. Armed with that, they’ll be able to determine whether a program like this will pay for itself for them or not.
For banks it’s a good idea, as many people like to enter into reward programs, and many times they’ll do that and very seldom tap into the earned rewards, making it less expensive for the bank to provide for them.
Either way, we’ll see a push toward reward programs in 2010 in connection to debit cards as an additional way for banks to generate revenue.
In good news for JPMorgan Chase (NYSE:JPM), they almost doubled their fees generated from equity capital market (ECM) underwriting, as the company enjoyed an estimated $2.2 billion in revenue from the business.
Equity capital markets refer to underwriting and selling the stock of a company, a very lucrative part of the investment banking business. This is one of the reasons large banks will strongly fight against reinstating the Glass-Steagall act, which is being pushed by some lawmakers at this time.
What’s interesting on the investment banking side is the change in the main revenue generator, as in the past it has largely been fees generated from advising on mergers and acquisitions, which have largely dried up over the last couple of years.
Much of the growth in ECM came from the booming equities market over the last year or so, which helped drive the much-needed raising of cash after a dismal 2008.
Overall global growth for the ECM market came in just under $890 billion, which was up a huge 27.7 percent from 2008. A significant portion of that was of course related to the capital requirements of banks which needed to raise significant money during the economic crisis. Of the $689 billion in follow-on activity, close to 50 percent was connected to the capital needs of banks.
Along with J.P. Morgan Chase, which led the ECM field, was Goldman Sachs (NYSE:GS), which came in at the second spot, while Bank of America moved up one slot to number three on the list, a surprise to many considering the seemingly endless struggles the company experienced throughout 2009.
Some may be surprised at the large increase in the overall ECM, but when you take into consideration it was led primarily by IPOs from the Asian market, and it makes better sense. Of the top ten IPOs in 2009, eight of them were from Asia.
The type of IPO that excelled this year are what are called carve-out IPOs. What this means is a mature company with a proven track record replicates its business in another market; although there can be some differences from the parent company.
These are attractive in the current economic conditions as investors are looking for stability and something they can count on rather than an unproven entity.
While this is good news for ECM in general, the reality is business is still difficult in the sense of consistency, and going forward into 2010, it will still be that success will be determined on a case-by-case basis rather than an overall surge in the IPO market.
There are always unintended consequences to government interference in the marketplace, and that’s no exception with the banking industry, as recent fees were added to checking accounts at Bank of America (NYSE:BAC) and Citibank (NYSE:C) in order to make up for lost income from recent government regulation added to the industry.
Unfortunately, consumers, for the most part, don’t understand that if income is forcibly taken away through government interference, then it will have to be made up somewhere else, or there wouldn’t be a banking industry.
So when people were socked with overdraft fees, for example, or high interest rates on their credit cards, they rebelled via the government, pressuring lawmakers to interfere so they wouldn’t have to pay these additional fees.
Now new rules will stop much of the overdraft fees collected, while banks will need to change their credit card practices as well.
I don’t mean by this that the banks shouldn’t have communicated better concerning the overdraft fees or credit cards, but it was still the responsibility of people with accounts to manage their financial affairs, and not spend money they didn’t have in their accounts.
The point is, banks are in business to be profitable while offering a variety of services. If revenue is blocked up in one area, they’ll simply transfer it to another, where consumers will have to pay for it. Nothing is for free, and if consumers want to use a bank, it’s not going to be for free … someone has to pay for it.
Essentially what happens with government interference in the markets is they stop up one revenue hole, which then causes a bank or financial institution to find and open up another. In the case of checking accounts, that’s what’s now happening. One way or another, banks have to make a profit in order to continue operating. They’re not non-profit organizations.
While taxpayers in America were rightly angered by the bailouts of the banks, those that were poorly run indeed should have been allowed to fail so those that kept operational costs under control could have survived and grown, creating a healthier financial base for the country. Since that wasn’t allowed, the focus was turned to any type of unpopular bank practice like overdraft fees in order to vent some of consumers’ anger toward them.
The bottom line is if government interference cuts off a revenue stream, the consumer eventually will pay for it by adding fees to former free or low-fee services. That will probably increase at other banks who have to make up for the revenue lost from unpopular revenue streams, specifically those being regulated by the government.
I labeled this as folly because it’s inevitable that it happens, and a healthy banking system must of course generate revenue. No matter how many holes the government attempts to plug up, the consumer will end up paying for it in the long run, making the cost of doing business with banks – for them – even higher.
Unfortunately for consumers, they’re not going to understand that their anger and rants simply transferred what they paid from banking from one type of fee for another. Unintended consequences.