Debit Card Fees: The Ball Is in Bernanke's Court

Under Senate rules, the amendment offered by Sen. Jon Tester (D-Mont.) and Sen. Bob Corker (R-Tenn.) for a six-month delay and study period failed because it did not win the 60 votes required to cut off debate.

The focus now shifts to the Federal Reserve Board, which is required to adopt implementation rules by July 21.

Given Chairman Ben Bernanke's actions and public statements, he is expected to propose fee limits that are not as harsh as the $0.12 per transaction limit proposed by the Fed staff last December, but it is unclear what limit Bernanke will see as both reasonable and consistent with the language of Dodd-Frank.

"We expect banks to impose new checking account fee structures shortly after the Fed adopts final rules," Susquehanna Financial analyst David Hilder wrote in a note to clients.

It is somewhat surprising that Sens. Tester and Corker forced a vote on their proposal for a six-month delay reduced from an original two-year delay for more study in implementation of the Durbin amendment, given that they did not have the necessary 60 votes lined up.

However, it may be that the banking industry wanted a roll-call vote on the issue, even if it fell short of 60 votes, to show that a majority of the U.S. Senate is actually in favor of a delay.

Hilder believes Bernanke clearly has concerns about the unintended consequences of the Durbin amendment and the Fed staff proposal that would limit debit-card interchange fees to $0.12 per transaction, which would reduce bank debit-card interchange revenue by about 75 percent.

When Bernanke wrote to Congress to explain that the Fed would miss its April deadline for adopting final rules to implement the Durbin amendment, he noted that the Fed had received 11,000 comment letters on the draft rules.

Bernanke is also clearly aware of the banking industry's estimate that the higher fees banks will charge on checking accounts to recover lost debit-card revenue could push perhaps 5 percent of current bank customers out of the system and into the use of check-cashing stores and other nonbank financial services.

There is no way to predict what rules the Fed will ultimately adopt, though we would expect them to be less negative than the $0.12 per transaction limit proposed by the Fed staff. The chief financial officer of U.S. Bancorp this week estimated that it costs USB, one of the largest debit-card issuers and the most expense-efficient large bank, more than $0.30 to process each debit card transaction.

Once the Fed adopts final rules to limit debit-card interchange fees, the banks will quickly impose new fee structures on checking accounts and the debit cards attached to them.

Meanwhile, the major banks have been experimenting with higher monthly account maintenance fees, higher minimum balances to avoid fees, specific charges to have a debit card, or per-use charges for debit-card transactions.

For most banks, the revenue each major bank would have to recover per checking account on average to offset the 75 percent revenue loss comes in the range of $4 to $6 per month per checking account.

Averaged across 25 million to 35 million checking accounts for the very large banks, that is a lot of revenue to recover, but it seems that somewhere between 50 percent and 75 percent of that revenue can be recovered over time.

Sen. Dick Durbin pointed out repeatedly on the Senate floor on June 7, about 50 percent of the entire banking industry's debit card revenue goes to Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM).

Meanwhile, analysts expect greater clarity with the Federal Reserve's release of the final rules on debit interchange prior to the Dodd-Frank effective date of July 21.