U.S. banks could lose billions of dollars of annual revenue as new regulations cut into debit card fees, and lenders will likely be fighting regulators for years for the right to charge new fees to make up for lost profit.
The Federal Reserve is due to unveil curbs to so-called debit interchange fees on Thursday, as part of the sweeping Dodd-Frank financial reform bill signed into law in July.
Banks and transaction processors Visa Inc and MasterCard Inc collect the fees from retailers every time a customer buys something with a debit card.
The Fed has provided little indication of how it plans to restrict interchange fees, and banks and networks say they are uncertain about what to expect.
The stakes are high, and detail on the Fed's proposed limits could dent the share prices of the biggest banks and credit card lenders, including Bank of America Corp and JPMorgan Chase & Co.
Lobbyists following the issue have said the Fed is tightly holding information about the rule and it is not clear whether the agency on Thursday will spell out exactly what the fee limit will be, or whether it will seek comments on two or three proposals for how limits could be set.
The U.S. banking industry overall could lose $9 billion out of the $22.8 billion in debit card fees banks collect each year, according to credit card comparison web site CardHub.com. But most bank investors and analysts are bracing for worse.
If it's a 50 percent reduction or less, that's better or as good as the market is expecting, said Evan Staples, equity analyst with First American Funds, which owns shares of U.S. banks and networks Visa and MasterCard.
Bank of America, the largest U.S. retail bank, spooked investors in July when it said the law could cost it between 60 percent to 80 percent of its annual debit fee revenues - or $1.8 billion to $2.3 billion - alone. The company's shares sold off nearly 12 percent in the days following its warning.
Banks and networks are weighing ways to make up for the lost debit revenue. They may reduce services, or charge new fees, or both.
No business is going to offer a service that loses money, said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which is made up of banks and credit card companies.
New fees could clash with another provision of Dodd-Frank -- the creation of a new consumer protection bureau, which will have the ability to write and enforce rules on consumer financial products. Some industry members expect the agency to take an unfavorable view of any new fees that banks add to debit cards in order to make up for lost interchange revenue.
It is going to be a bit of a game of whack-a-mole, said Intrepid Ventures payments consultant Eric Grover, referring to a popular carnival game in which mechanical moles are whacked, only to pop up elsewhere.
Any fees on financial services products are potentially at risk with this agency, Grover said.
But Robert Hunt, director of the Philadelphia Fed's payment cards center, a research unit, said problems may arise more from disclosures than any new fees themselves.
The challenge will be, if you start charging a new price you have to disclose it, he said in an interview in Philadelphia on Tuesday. If you're not good at those disclosures, that could create some issues in the long run.
LOST IN THE SHUFFLE
Analysts expect Visa and MasterCard, which process debit transactions but pass most of the fees on to the banks, to be less directly affected by the Fed's rules.
But a cut in debit interchange could ultimately reduce the fees that banks are willing, or able, to pay Visa and MasterCard for processing transactions.
Shares of both networks fell over 20 percent after the provision limiting debit interchange was introduced in May, but have largely rebounded this fall. As investors await more certainty on how the networks will be affected by the Fed's curbs, they said that any news would be good news.
The credit card companies are definitely in a preferred position, said Michael Holland, chairman of money manager Holland & Co, which owns shares of U.S. banks and Visa.
Although the banks may ultimately feel more of an impact from the Fed rules than the card networks, some investors expect the impact of debit interchange reductions to pale in comparison to the other effects of Dodd-Frank -- not to mention more recent industry concerns about potential massive losses on mortgage bonds.
The interchange provision is less of an overhang on the big banks than some of the other provisions of the bill and less of an overhang than this mortgage putbacks issue, First American's Staples said.
(Reporting by Maria Aspan in Philadelphia and New York; additional reporting by Dave Clarke in Washington; Editing by Tim Dobbyn)