August 4, 2011

Over the recent past, there have been numerous regulatory changes that limit bank revenue through fee collection and other practices. It should come as no surprise that as certain banking products become less lucrative, banks will look for ways to mitigate the effect of lower revenues by changing the way they market their products and incentivize new and existing customers. However, these changes are perceived negatively by consumers and present a marketing challenge for an industry already struggling with an image problem.

Many banks, including JP Morgan Chase, one of the nation’s largest, have cut or curtailed their debit card rewards programs as a result of pressures from the Durbin Amendment to the Dodd-Frank Financial Reform Act. Even though the law’s cap on interchange fees is not as severe as anticipated (the cap was set at $.21+ per transaction, as opposed to the expected $0.12 per transaction) it was enough to persuade the banks that the rewards programs are not feasible.

These new debit rules also will allow retailers – who frequently complain about paying bank interchange fees – to limit acceptance of credit and debit cards for small purchases. Our tracking data confirms the trend of consumers’ increasing usage of credit cards or debit cards for purchases of $10 or less — the percent of card-based purchases of under $10 has increased each year for the past several years. However, a recent Lightspeed Research survey shows how consumers respond to the potential limits on the use of plastic depends heavily on how retailers position the new rules. Asked how they feel about stores charging a “higher price” for using your credit or debit card than when you pay with cash, 77 percent oppose. But when a separate sample was asked how they feel about stores charging a “lower price” for using cash instead of a card, just 18 percent strongly oppose – and 21 percent strongly favor.

Debit card rewards are not the only casualties of the new rules. Banks are reeling from the effects of a one-two punch that has slammed the industry in the past year. In addition to the debit interchange restrictions, new federal regulations require banks to stop charging overdraft fees unless a customer has opted-in to being charged the fees — and not surprisingly, many customers did not opt in despite industry efforts. Lightspeed Research’s tracking data estimates suggest bank revenues from overdraft fees may have dropped by as much 40 percent as a result.

Checking accounts were never extremely profitable products for banks, and were often viewed as loss-leaders for more profitable lending and investment products. But with these changes significantly cutting into revenues, banks will respond with additional changes to checking accounts. In addition to eliminating expensive debit card rewards programs, many banks are making it harder to qualify for “free” checking by increasing minimum balances or required transactions per month. Banks also are increasing fees for ATM use and other banking services.

These changes with their unavoidable negative response from consumers, are presenting formidable marketing challenges for banks. Without many of the marketing tools banks have traditionally relied upon, they are being forced to explore alternatives. For banks, it has never been more important to develop and test differentiated products, to hone messaging by consumer segment and to deeply understand and connect with customers.

For more information about the Lightspeed Research Financial Services Group, visit our corporate website.

Category:Financial Services Group
Posted on August 4, 2011



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