Interchange Paradox: Cap May Spur More Transactions
An expert in consumer behavior with checking accounts and debit cards has predicted that a proposed cap on debit interchange might, in the end, lead to more debit card transactions.
He has also said that credit unions and community banks would be "foolish" if they followed the lead of some major banks and attached fees or conditions to their checking accounts or debit cards.
Robert Giltner, chief strategist for checking and direct deposit accounts for Velocity Solutions Inc, a consultancy and technology firm, headquartered in Wilmington, N.C., argued that as income per debit transaction drops, the most financially sound thing to do is to increase the number of debit transactions and take measures to increase direct deposit account revenue.
"The debit card is the single most successful and innovative financial product in the last 30 years," he said, arguing that financial institutions in general but credit unions and community banks in particular will act foolishly if they try to limit or stop the way consumers use their debit cards.
"We're already seeing that happen in some of the larger banks, but it is not across the board," Giltner said, pointing that a number of the larger regional banks such as PNC Financial have already announced they are keeping their free checking in place. "But enough are doing it that both credit unions and community banks stand to gain a lot of new accounts," he said.
He also pooh-poohed the idea that CU members or community bank customers might close free checking accounts to protect other accounts from fees. There might be some of that, he said, but the research data shows pretty conclusively that the overwhelming majority of consumers expect free checking, and they will leave if a financial institution takes it away.
He also cited TCF Financial, the bank that is suing the Federal Reserve over its proposed debit interchange cap, as proof of the consumer preference, noting that the bank has been reported to have lost a large number of checking accounts after it announced it would start charging a fee for them.
According to an article in the March 2011 US Banker that Giltner cited, TCF announced a $9.95 fee on checking accounts with balances of less than $500 in January 2010. The bank lost 250,000 checking accounts by May. This dropped the bank to the level of checking accounts it had held in 2004.
TCF has argued in its legal briefs that it is unconstitutional for the government to force a company to provide a product or service at price that is less than the product's costs and that it would be unable to recoup the lost debit interchange in other fees.
But Giltner noted that some debit card behavior was likely to change after the cap, just not the behaviors that the cap's authors expected to change. The increased number of debit transactions, for example, might arise as financial institutions seek to make up for the loss in debit card income at the higher interchange rate with increased debit card volume at the lower interchange rate. By the law of unintended consequences, this could actually lead credit unions and community banks to keep or add incentive programs onto their debit cards–albeit at a lower rewards rate than they might have had in the past.
He also maintained that even if a credit union or community bank decided it need to start charging fees to help maintain income, there were better methods of doing so than simply charging a fee on all checking accounts.
Instead, he suggested adopting fee structures that seem likely to provide incentives for more debit card use. For example, a credit union could charge a small fee for debit card issuance, but then waive that fee if the debit card holder makes a certain number of transactions per month, he explained.
He also recommended that credit unions study the behavior of members who already use their debit cards but who also use a lot of cash.
"The millennial generation, for example, has the heaviest debit card usage but are also big users of cash," he observed. "How can credit unions move more of these cash transactions to debit card transactions," he asked. n