SOURCE: Packaged Facts

Packaged Facts

December 06, 2010 13:13 ET

Recession-Induced Changes Create Perfect Storm for Consumer Banking Industry

NEW YORK, NY--(Marketwire - December 6, 2010) - Driven by a confluence of recession-induced changes, 2010 brings a perfect storm to the consumer banking industry: deteriorated credit quality, consumer credit pullback, shrinking credit card portfolios, and sweeping regulations imperiling tens of billions of dollars in revenue, according to Regulatory Change and The New Consumer Card and Banking Relationship by market research publisher Packaged Facts.

These consumer banking changes are being driven by three key regulations: the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act); Regulation E (Reg E), revised by the Federal Reserve; and the Durbin Amendment, which addresses debit interchange as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The ramifications of the CARD Act on banking practices and revenue have been seismic, as the new consumer protections carve deeply into not only card-based banking revenue but also the structure of the card programs themselves. Because the regulations come at a time when consumer spending and debt levels have reached precarious levels, the effect has been magnified. However, strategies have been deployed to potentially recoup losses. These include some banks returning to or raising annual fees, and experimenting with tiered fee structures tied to different levels of card rewards and benefits.

Consumer overdraft protection is a lynchpin of consumer banking revenue, with some estimates of overdraft fee revenue reaching almost $40 billion per year. However, the changes to Reg E put a significant chunk of revenue generated by overdraft fees at risk. These recent amendments require that consumers affirmatively consent before institutions may charge overdraft fees for ATM and one-time debit transactions and place restrictions on gift cards.

Meanwhile, potential losses stemming from the Durbin Amendment are enormous. Packaged Facts' analysis of financial institution data from the Federal Financial Institutions Examination Council indicates that total debit and credit card interchange potentially exceeds $70 billion. Bank of America generated more than $2 billion in debit interchange fee revenue during third quarter 2010 alone. In the end, how much is at stake will depend largely on how the Federal Reserve decides to interpret the "reasonable and proportional" provision.

"Ultimately, the effect these regulations have on consumers will determine the bottom line. Thankfully for the industry, we at Packaged Facts predict some key consumer behavioral trends will soften the blow," says Don Montuori, publisher of Packaged Facts. 

Despite increasing distrust of banks, consumers continue to shift their payment preferences toward electronic payments. Packaged Facts analysis of Experian Simmons National Consumer Study data reveals that 53% of consumers in Spring 2010 said they often prefer cash to pay for the things they buy, a decline of seven percentage points in six years. And while overall credit card engagement has fallen during the recession, in a boon to the industry, among consumers who have used their cards in the past month, the percentage who do so at least 20 times a month has increased. Meanwhile, Packaged Facts predicts that the affluent and young adult (age 18-24) demographics will influence the impact of consumer banking regulations going forward.

Regulatory Change and The New Consumer Card and Banking Relationship is necessary reading for industry participants navigating the effects sweeping regulations are having on their credit card, debit card, gift card and consumer banking strategies. In emphasizing a trend-forward philosophy, the report also assists in viewing the impact of these regulations into 2011 and 2012. The report breaks down relevant regulations and their impact on the market, in part by trending important industry metrics (such as interest rates, fees, and penalties) in detail. To help gauge the effect and future ramifications on the consumer, Packaged Facts conducts "Regulatory Impact and Trend Forecasting" on three groups significantly affected by the regulations: Echo Boomers, The Affluent, and The Debt-Burdened. For further information, please visit:

About Packaged Facts -- Packaged Facts, a division of, publishes market intelligence on a wide range of consumer market topics, including consumer goods and retailing, foods and beverages, demographics, pet products and services, and financial products. Packaged Facts also offers a full range of custom research services. To learn more, visit: Follow us on Facebook, LinkedIn and Twitter.

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