The arguably natural consequences of fee caps and limits on debit interchange — and the uncertainty of the regulatory climate — are now showing up with an anticipated pullback by banks on traditionally “free” services and products.
Amid that pullback, there’s opportunity for neobanks, the digital-only upstarts that have been seeking to make inroads against their larger brethren, to take some market share. But that’s only if they craft business models that are less dependent on interchange/transaction volumes in an environment where consumers are fickle about how much they’re spending, and where.
As reported by The Wall Street Journal on Friday (July 5), JPMorgan has noted that potential new rules that trim overdraft fees and card fees will make it more expensive for banks to provide checking accounts and other offerings — so new fees are going to be levied on consumers.
“The changes will be broad, sweeping and significant,” said Marianne Lake, CEO of consumer and community banking at JPMorgan, per the Journal. “The people who will be most impacted are the ones who can least afford to be, and access to credit will be harder to get.”
As PYMNTS has documented, the Consumer Financial Protection Bureau has sought to lower the typical late fees charged by card issuers from an average of $32 to — in most cases — $8. Elsewhere, the Supreme Court ruled last week that a suit by merchants group challenging debit card interchange fees can proceed.
JPMorgan is not alone here, of course. All manner of banks may seek to offset the loss of fee income in other ways. And there’s some historical indication, already, that consumers wind up missing out on innovations and rewards they value when new regulations are rolled out.
According to a March column penned by Karen Webster, the Credit Card Competition Act stands as a prime example of what happens when mandates — in this case dual routing — spur issuers to reduce rewards tied to cards.
And as noted in the study “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis,” economist David Evans wrote that banking customers “lost more on the bank side than they gained on the merchant side,” by as much as $25 billion in discounted value dollars, as a result of the interchange fee caps implemented by the 2010 Durbin Amendment. Banking trade groups have estimated that after Regulation II took effect, the percentage of banks offering free checking accounts declined from 60% to less than 20%.
As for the opportunities in front of digital-only players, PYMNTS Intelligence data has revealed younger generations are primed to switch their financial relationships away from the biggest banks, as well as community-based players.
PYMNTS Intelligence research found that 42% of Generation Z who bank with credit unions have changed their banking relationship over the last 12 months, as have 44% of Gen Zs that bank with traditional financial institutions.
Sixty percent of those switchers have kept their prior account open but no longer use it as their primary banking relationship — it’s no longer top of mind and/or top of wallet. Forty percent have closed their account completely. It’s not farfetched to think that the switching of allegiances might be accelerated with new fees on accounts.
But that’s a big If.
The digital players may find increasing pressures on their own models and interchange dynamics change. We reported this past spring that many of these companies still tie their fortunes to the payment networks, and by extension, payment volumes.
Chime details on its website that banking services are provided by banking partners such as The Bancorp Bank and Stride Bank. Those financial institutions also issue the credit and debit cards that are used by Chime’s members (such as the Chime Visa Debit Card). Chime noted that it makes money by consistent debit transaction volume among its members.
“Most of Chime’s income is from Visa,” said the company on its site.
Separately, Monzo’s earnings results, detailed in its latest annual report, showed that the company has been profitable on an operating basis. The bulk of income comes from transaction income, which includes interchange fees, and this line item represented 75% of the firm’s commission and fee income in the latest reported year.
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