Retail Banking Fees – How the Durbin Amendment Impacts Customer Loyalty
The Frank-Dodd Act includes a small section that changes bank profitability in a big way: The Durbin Amendment. The amendment limits interchange fees merchants pay for debit card transactions. In theory, the legislation ought to create a more competitive payment structure. Banks typically earn 1.3% of the total debit transaction. By limiting the amounts banks could charge merchants for accepting debit card payments, retailers should pass on those savings to consumers. The Durbin Amendment set out to minimize the fee, and bring the cost of using debit cards closer to actual processing costs. But its impact is costly: billions, worldwide, in accrued earned fees.
To mitigate this hit on profitability, many large US banks, including Wells Fargo, JPMorgan Chase and Bank of America considered tacking on a $3-$5 monthly debit card fee. Other banks cut debit card loyalty rewards. Banks scrambled to find ways to cover the lost revenue and minimize the cost-to-income ratio of offering debit card services.
Needless to say, customers were outraged. Backlash against these large banks included a “Bank Transfer Day” campaign, set for November 5th, urging consumers to ditch banks with debit card fees, promising business to those smaller banks and credit unions with no fees.
Debit Card fees were no longer the solution to the Durbin Amendment. Most banks had to go back to the drawing board to find alternatives means of recouping those lost interchange fees. Not only did they lose a revenue stream, they lost their customers’ goodwill, and in many cases, customers.
What if, instead of looking at this Durbin Amendment as cutting off profitability, banks looked at this moment in time as an opportunity to create true Customer Loyalty through more effective pricing and customer relationship longevity and investment?
Many banks do not take full advantage of providing multiple services to a single customer. Sure, a customer may have an underused, unprofitable checking account, and any increase in fees on that account would spell “Closed Account” for a price-sensitive consumer. But if that customer sees the value of having money markets, CDs, loans, IRAs, and any number of a dozen other services – all provided at the most competitive market pricing – all from the same institution, what that customer has for that bank is loyalty. Customer loyalty breeds profitability.
Now is the time for banks to introduce new financial products and services. Speed to market can ensure continued customer loyalty, and even entice new customers to open accounts. The key to speed to market is accurate relationship pricing. Having a relationship pricing platform that maintains an active product catalog, manages dynamic pricing, and gives product managers access to profitability analysis is critical for the survival of profitable banking.
If Bank of America had been able to run “what if” scenarios, it would have seen how fee changes might have impacted the loyalty of its customer base. It is this profitability analysis that allows banks to gauge the true impact of their decisions on their bottom line – and ability to retain customers. Profitability analysis also provides insight into untapped customer loyalty opportunities, highlighting chances to add products and services to customers’ portfolios.
The miRevenue Solution Suite for banking is unique in offering a product simulation environment – in other words, the 'what-if' and profitability analyses – as well as an active product catalog and dynamic pricing components. Contact us to learn more about fostering Customer Loyalty in a Dodd-Frank regulated environment, and turn the Durbin Amendment into an opportunity.