Regulatory Change and The New Consumer Card and Banking Relationship
 

Regulatory Change and The New Consumer Card and Banking Relationship

on

  • 426 views

 

Statistics

Views

Total Views
426
Views on SlideShare
426
Embed Views
0

Actions

Likes
0
Downloads
1
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Regulatory Change and The New Consumer Card and Banking Relationship Regulatory Change and The New Consumer Card and Banking Relationship Document Transcript

    • Get more info on this report!Regulatory Change and The New Consumer Card and BankingRelationshipDecember 1, 2010Driven by confluence of recession-induced changes, 2010 brings a perfect storm to thecard industry: deteriorated credit quality, consumer credit pullback, shrinking credit cardportfolios, and sweeping regulatory change. The CARD Act and the Dodd-Frank Act arereshaping both ends of the consumer banking relationship, as industry participantsretool their consumer card and banking strategies, and as consumers adapt theirbanking and card preferences, attitudes and usage patterns as the recession continues.Packaged Facts’ Regulatory Change and The New Consumer Card and BankingRelationship is necessary reading for industry participants navigating the effect thesesweeping regulations are having on their credit card, debit card, gift card and consumerbanking strategies. In emphasizing a trend-forward philosophy, the report also assists inviewing the impact of these regulations into 2011 and 2012.The report breaks down relevant regulations and their impact on the market, in part bytrending important industry metrics (such as interest rates, fees, and penalties) in detail.To help gauge the effect and future ramifications on the consumer, Packaged Factsconducts “Regulatory Impact and Trend Forecasting” on three groups significantlyaffected by the regulations: Echo Boomers, The Affluent, and The Debt-Burdened.“Regulatory Response and Strategy Profiles” of the top 10 card issuers help gaugeindustry responses and strategies.Table of ContentsChapter 1: Executive Summary The CARD Act: Challenges and Strategies Card Act - Stage I - August 2009 Notice and mailing requirements Card Act - Stage II - February 2010 Eliminating harmful practices and increasing transparency
    • Card Act - Stage III - August 2010Disproportionate penalties and rate increase reevaluationFee must be reasonable and proportionalFederal Reserve moves to amend regulations and provide clarificationRamifications of the CARD ActCost to banks in the billions“Reasonable and proportional” application still loomsStrategies to make up the differencePenalty and Transaction Fee TrendsConsumer Overdraft Protection: Challenges & StrategiesThe Key Provision: Regulation EWhat is it?Amendments and their effectOverdraft Revenue & Usage AnalysisFDIC Study of Bank Overdraft ProgramsEarnings estimatesRevenue estimatesRevenue drivers90% of NSF fees accrued from customers with 5+ NSF transactions per yearFDIC proposal foretells more regulation, reduced fee incomeSupervisory action threatenedSteering high-frequency overdraft users a no-no—and we’re watchingOpt-out of non-ATM and non-POS debit transactions?High-to-low processing history? Prepare to hideWells Fargo litigation sets precedent for additional litigationFor how much could the industry be on the hook?$203 million in restitution to Californians for three years of high-to-low posting
    • Strategies going forwardKeep trying to get them to opt in!Or engage in “revenue expansion”Overdraft revenue fallout & evolving strategy applicationsQ3 2010 tale of the tapeDodd-Frank Wall Street Reform: Challenges and Strategies 13The Durbin Amendment & Debit InterchangeActual cost incurredMerchants allowed to set minimum amounts and incent use of cashWoe to debit interchange!We believe commercial banking combined interchange exceeds $70 billionQ3 2010 combined card interchange among top 10 banks: $17 billionQ3 2010 debit interchange tops $2 billion at Bank of America aloneGoing forwardSue the government!Segue into contactlessOr buy stock in PIN debit processorsBureau of Consumer Financial ProtectionWhat is it and what is it supposed to do?What is the scope of its authority?Broad rule-making authorityBroad enforcement authorityMacroeconomic Influences & Consumer Wealth AnalysisConsumer confidence helps put brakes on spendingUnemployment picture stabilizesUnemployment and GPD forecastConsumer Wealth on the Mend
    • Household wealth repairCase-Shiller and FOMC housing pessimismHouseholder equity comes off its bottomStock equity trendsConsumer & Industry Credit and Loan Performance Trends 20Saving more + paying down debt = a healthy consumerChipping away at the debt burdenConsumers unburden themselves of debtDebt service ratios peak at onset of 2008 and decline thereafterConsumer & Household Loan TrendsCredit Card TrendsRevolving credit declinesCredit card loan performance trendsCredit card interest income a saving graceCard lending policies final loosen a bitUnused credit line culling coming to a close?Credit card tightening starting to loosenCard Loans Outstanding Growth Mirrored By Purchase Volume GainsVisa leads MasterCard in credit and debit purchase volume growthBig Six Issuers each grow purchase volumeDeposit TrendsBank of America leads total domestic depositsBanking Institution Regulatory Strategy ProfilesAmerican ExpressResponse to Credit CARD ActRegulatory ImpactCARD Act impact
    • Durbin Amendment impactU.S. growth trendsJPMorgan Chase & Co.Chase’s take on regulatory reformCard ServicesResponse to CARD ActAdjust intro rates, promo rates, and contract ratesRetail BankingReg E impactMore than 26 million checking accounts—1,300 per bankerBank of AmericaCompany OverviewGlobal Card Services segmentCARD Act Response$1 billion CARD Act impactDeposits segmentReg E strategy and impact$1 billion after-tax!Overdraft strategy: high-to-low ringing in Bank of America’s ears?eBanking intended to drive down costsLooking ahead: Not an overdraft fee; a convenience fee$10 billion Durbin Amendment impactCapital One FinancialCard Act and RewardsDiscover Financial ServicesCompany overviewNetwork and Card Initiatives
    • Student loans diversify company away from plasticAnd toward cross-selling opportunityWells FargoCross-selling championResponse to Credit CARD ActCARD Act impactConsumer BankingReg E impact: $800 million and countingHigh-to-low reaches a low pointU.S. BancorpConsumer BankingPayment ServicesReg E, CARD Act and Durbin ImpactRevised overdraft policyCitigroupCards and CARD ActSimplicity in checkingConsumer Financial Services Usage & AttitudesNegative attitudes provide opportunityCredit card engagement falls; high-frequency use increases shareBalance payment trends relatively unchangedFocus on young adultsTable 1-1: Echo Boom Generation, % of Population, 2006-2015Protections for young people not reflected in issuer terms and conditionsCampus credit card promotional agreements monitoredThree-quarters of campus spend from Bank AmericaAlumni organizations & foundations generate disproportionate account share
    • Table 1-2: Educational Institutions and Organizations, Card Agreements, Selected Metrics, 2009 Students age 18-20 comprise 56% of all students Table 1-3: Full-Time and Part-Time Students, By Age, 2010 Focus on the affluent Primary banking relationships provide the key to success Wells Fargo commands mass affluent shareChapter 2: The CARD Act: Challenges and Strategies Card Act - Stage I - August 2009 Notice and mailing requirements Card Act - Stage II - February 2010 Eliminating harmful practices and increasing transparency Card Act - Stage III - August 2010 Disproportionate penalties and rate increase reevaluation Fee must be reasonable and proportional Federal Reserve moves to amend regulations and provide clarification Consumer protections enhanced Promotions waiving interest & offering reduced rate afforded same protections Fee cap applies to fees charged before and after the account is opened Individual’s independent income must be considered Ramifications of the CARD Act Cost to banks in the billions “Reasonable and proportional” application still looms Rewards on the block? Rewards-related penalties crop up Strategies to make up the difference Penalty and Transaction Fee Trends Penalty interest rates increase
    • Undisclosed penalty APRs on almost 50% of cards Late fees remain ubiquitous while overlimit fees decline Penalty interest rates increase and are still widely used Cure period disclosures Transaction surcharge fees remain common Cash advance fee and balance transfer rates rise Annual fee amounts spikeChapter 3: Consumer Overdraft Protection: Challenges & Strategies The Key Provision: Regulation E What is it? Amendments and their effect Getting more specific No fees for ATM and one-time debit card overdrafts without opt-in No exceptions Written documentation Does not apply to check, ACH, and recurring debit card transactions Overdraft Revenue & Usage Analysis FDIC Study of Bank Overdraft Programs 4 in 5 automated programs allow ATM and POS overdrafts Customers informed afterward High-to-low ordering practices conducted by majority of large banks Earnings estimates Revenue estimates Revenue drivers 90% of NSF fees accrued from customers with 5+ NSF transactions per year H1 2010 Overdraft Revenue and Usage Trends Table 3-1: U.S. Banking Overdraft Revenue, 2005-2011 ($ billions)
    • Opt-in trendsRevenue drivers: high-frequency overdraft usersStudy asserts 60% and 80% opt-in rateWe’re more pessimisticPackaged Facts Foresees More Trouble AheadFDIC proposal foretells more regulation, reduced fee incomeLimits on number of overdrafts, daily fee accrual and high-to-low processingSupervisory action threatenedSteering high-frequency overdraft users a no-no—and we’re watchingOpt-out of non-ATM and non-POS debit transactions?Wanted: Responsible transaction account and small-dollar loan programinnovation!Outcry, outcry!Scrutinize? Take supervisory action? Industry says this goes too farSet expectations, but don’t regulate themConsumers and consumer groups want it to go furtherConsumer advocacy groups circle the wagonsSet concrete limits—and enforce them!High-to-low processing history? Prepare to hideWells Fargo litigation sets precedent for additional litigationFor how much could the industry be on the hook?$203 million in restitution to Californians for three years of high-to-low posting11% of overdraft revenueThe details: High-to-low posting under legal fireCommingling and deployment of the shadow lineLegal conclusion: gouging & profiteering drove overdraft program changesStrategies going forwardKeep trying to get them to opt in!
    • Or engage in “revenue expansion” Table 3-2: Fiserv revenue realization estimates, overdraft mitigation strategies New deposit products Short-term liquidity solutions Cross-sell, loyalty and retention products Predictive Analytics Overdraft revenue fallout & evolving strategy applications Q3 2010 mitigation: tale of the tape Provident & National Penn succeed with high-frequency users PNC, Regions and Fifth Third losses range from $5 million to $50 million Bank of America new account opt-in rate at 40% SunTrust eliminates fees on transactions valued at less than $5 First Financial Bancorp reports no customer attrition “Grace period” trades fee income for market share & customer satisfaction Customization + cross-selling = revenue Compass Bancshares customizes with “free” checking and “premium” add-ins KeyCorp gives layered “Key Coverage”—for $10 a month Proactive communication + courtesy = fees and higher customer satisfaction United Heritage Credit Union: “Courtesy Pay” to “help” and provide “options” A friendly reminder from mobile banking . . . . . To incentivize use of overdraft protectionChapter 4: Dodd-Frank Wall Street Reform: Challenges and Strategies The Durbin Amendment & Debit Interchange Bottom line Fees Reasonable and proportional Actual cost incurred
    • Who’s exempt? Merchants allowed to set minimum amounts and incent use of cash Woe to debit interchange! $20 billion in the balance? We believe commercial banking combined interchange exceeds $70 billion Q3 2010 combined card interchange among top 10 banks: $17 billion Q3 2010 debit interchange tops $2 billion at Bank of America alone Table 4-1: Top 10 Banks, By Bank Card and Credit Card Interchange Fee Income, 2010 Which helps explain Bank of America’s $10 billion goodwill write-off Going forward Sue the government! Segue into contactless Or buy stock in PIN debit processors Bureau of Consumer Financial Protection What is it and what is it supposed to do? To what or who does the BCFP report? What is its structure? What is the scope of its authority? Consolidation and enhancement of consumer protection authority Who is exempt? Broad rule-making authority Broad enforcement authorityChapter 5: Macroeconomic Influences & Consumer Wealth Analysis Consumer confidence helps put brakes on spending Current perceptions of business conditions, job prospects darken Expectations Index dips as job prospect optimism dims Unemployment picture stabilizes
    • Figure 5-1: Unemployment Rate and Consumer Confidence, 2007-2010 Unemployment and GPD forecast Adjusted projections Table 5-1: Unemployment and GDP Forecast, 2010-2012 Consumer Wealth on the Mend Household wealth repair Table 5-2: Household Net Worth, 2005-2010 (in trillions of $) Case-Shiller and FOMC housing pessimism Bottom line: recent growth, but weakening trends Householder equity comes off its bottom Table 5-3: Household owners equity in real estate, 2004-2010 Stock equity trends Bottom line analysis Figure 5-2: Wealth Effect: Wilshire 5000 and Case Shiller Index, 2007-2010Chapter 6: Consumer & Industry Credit and Loan Performance Trends Saving more + paying down debt = a healthy consumer Chipping away at the debt burden Consumers unburden themselves of debt Bottom line Figure 6-1: Consumer Debt Burden, 2000-2010 Debt service ratios peak at onset of 2008 and decline thereafter Analysis Figure 6-2: Savings Rate & Debt Service Ratio, 2007-2010 Consumer & Household Loan Trends Table 6-1: Loans Outstanding, by Loan Type, FDIC-Insured Institutions, 2007- 2010 (in billions of dollars) Mortgage loan performance trends
    • Figure 6-3: Loan Performance, Closed-End First Lien 1-4 Family ResidentialMortgages, 2007-2010Credit Card TrendsRevolving credit trends in focusFigure 6-4: Consumer Revolving and Non-Revolving Debt Trends, 2004-2010Figure 6-5: Consumer Revolving and Non-Revolving Debt Trends, % Change,2004-2010Credit card loan performance trendsFigure 6-6: Loan Performance, Credit Cards, 2007-2010Table 6-2: Credit Card Loans Outstanding & Unused Credit Card Lines, 2007-2010 (in billions of dollars)Table 6-3: Top 15 FDIC-Insured Institutions, Credit Card Loan Receivables, Q32009 vs. Q2 2010 (in billions of dollars)Figure 6-7: 30-Day Monthly Delinquency Rates, Top Six Card Issuers, %Change, 2009-2010Credit card interest rates increase while banks’ borrowing costs decreaseFederal funds target rate at historical lowsProfit margins breathe easierFigure 6-8: Credit Card Interest Rate & Federal Funds Rate Trends, 2004-2010Credit card interest income a saving graceFigure 6-9: Top 10 Banks, By Credit Card Interest Income, 2010Card lending policies final loosen a bitUnused credit line culling coming to a close?Credit card tightening starting to loosenFigure 6-10: Credit Card Loan Tightening, Top 100 Banks, Q1 2007 to Q4 2010Card Loans Outstanding Growth Mirrored By Purchase Volume GainsVisa leads MasterCard in credit and debit purchase volume growthFigure 6-11: Quarterly Purchase Volume, Visa and MasterCard, Credit and DebitCards, 2009-2010Big Six Issuers each grow purchase volume
    • Figure 6-12: Quarterly Purchase Volume, Big Six Issuers, Credit Cards, 2009- 2010 Deposit Trends Table 6-4: Domestic Deposits, by Type of Deposit, 2007-2010 (in billions of dollars) Bank of America leads total domestic deposits Table 6-5: Top 15 Commercial Banks & Savings Institutions, Total Number of Offices and Domestic Deposits, 2007 vs. 2010Chapter 7: Banking Institution Regulatory Strategy Profiles American Express Value Proposition Table 7-1: 2008 Worldwide Cardholder Spend, American Express, Visa, & MasterCard Company overview Response to Credit CARD Act American Express well-situated to take advantage of frugality trend Regulatory Impact CARD Act impact Durbin Amendment impact Sales and Card Growth Worldwide assessment Table 7-2: American Express Card Billed Business, Discount Revenue, Net Card Fees, 2007-Q2 2010 (in billions of $) Table 7-3: American Express Discount Rate, Card Spend, & Fee per Card, 2005- Q2 2010 U.S. growth trends Table 7-4: American Express U.S. Region Billed Business & Cards in Force, 2005-2009 JPMorgan Chase & Co. Chase’s take on regulatory reform
    • Card Services: Summary OverviewResponse to CARD ActAdjust intro rates, promo rates, and contract ratesTable 7-5: JPMorgan Chase Card Services, Interest Rate Offerings Change,2008-2009JPMorgan Chase Card Services by the NumbersDown, down, down: cards, transactions and volumeRetail Banking: Summary OverviewReg E impactMore than 26 million checking accounts—1,300 per bankerTable 7-6: JPMorgan Chase Retail Banking, Retail Footprint Metrics, 2005-2010Table 7-7: JPMorgan Chase Retail Banking, Household Product Usage, By Type,2005-2010Bank of AmericaCompany OverviewGlobal Card Services segmentCard Act Response$1 billion CARD Act impactCard Act and RewardsDeposits segmentReg E strategy and impact$1 billion after-tax!Overdraft strategy: high-to-low ringing in Bank of America’s ears?eBanking intended to drive down costsATM emergency cash tied to payroll card - and a $35 feeAnd emergency cash tied to credit cardAnd emergency cash tied to an ATM!Looking ahead: Not an overdraft fee; a convenience fee
    • $10 billion Durbin Amendment impactBank of America: Key MetricsTable 7-8: Bank of America, Selected Credit Card and Consumer BankingMetrics, 2008-09Table 7-9: Bank of America Demographics: A Tale of the Tape, 2010Capital One Financial2008-2010 trendsCard Act ResponseCard Act and RewardsCapital One: Key MetricsTable 7-10: Capital One, Key Credit Card Metrics, 2007-2009 (in millions, exceptratios and where otherwise noted)Discover Financial ServicesCompany overviewNetwork and Card InitiativesResponse to Credit CARD ActStudent loans diversify company away from plasticAnd toward cross-selling opportunityResponse to RecessionTable 7-11: Discover, Key Credit Card Metrics, 2007-2009 (in millions, exceptratios and where otherwise noted)Wells FargoCompany overviewCross-selling championResponse to Credit CARD ActCARD Act impactConsumer BankingReg E impact: $800 million and counting
    • High-to-low reaches a low point Wells Fargo: Key Metrics Table 7-12: Wells Fargo, Key Credit Card Metrics, 2007-2009 (in millions, except ratios and where otherwise noted) Table 7-13: Wells Fargo, Core Deposits, by Type, Q1 2009-Q2 2010 .147 Table 7-14: Wells Fargo, Retail Banking Metrics, 2010 U.S. Bancorp Consumer Banking Payment Services Reg E, CARD Act and Durbin Impact Revised overdraft policy Citigroup Cards and CARD Act Simplicity in checkingChapter 8: Consumer Financial Services Usage & Attitudes Trends Negative personal finance and banking attitudes provide opportunity Table 8-1: Attitudes about Personal Finance, 2005-2010 Table 8-2: Consumer Banking Products Usage, by Type, 2005-2010 Table 8-3: Consumer Loans, by Type, 2005-2010 Table 8-4: Consumer Investments, by Type, 2005-2010 Table 8-5: Credit Card Engagement, 2005-2010 Portion of paid balances Table 8-6: Credit Card Monthly Payments, Portion Paid, All Cards, 2005-2010 Focus on young adults Table 8-7: Echo Boom Generation, % of Population, 2006-2015 Protections for young people not reflected in issuer terms and conditions Campus credit card promotional agreements monitored Three-quarters of campus spend from Bank America
    • Alumni organizations & foundations generate disproportionate account share Table 8-8: Educational Institutions and Organizations, Card Agreements, Selected Metrics, 2009 Students age 18-20 comprise 56% of all students Table 8-9: Full-Time and Part-Time Students, By Age, 2010 Focus on the affluent Table 8-10: Household Income, by Income Bracket, 2008 Primary banking relationships provide the key to success Wells Fargo commands mass affluent share Table 8-11: Affluent Consumers, Primary Banking Relationship, by HH Income SegmentsChapter Appendix: Trended Credit Card Balances, Portions Paid Table 8-12: Credit Card Monthly Payments, Portion Paid, American Express, 2005-2010 Table 8-13: Credit Card Monthly Payments, Portion Paid, Discover, 2005-2010 Table 8-14: Credit Card Monthly Payments, Portion Paid, MasterCard, 2005- 2010 Table 8-15: Credit Card Monthly Payments, Portion Paid, Visa, 2005-2010Available immediately for Online Download athttp://www.marketresearch.com/product/display.asp?productid=2749750US: 800.298.5699UK +44.207.256.3920Intl: +1.240.747.3093Fax: 240.747.3004