Banks Push Credit Cards in Bid to Counter Debit Swipe-Fee Caps

U.S. caps on debit-card transaction fees set to take effect in October are spurring the biggest banks to push consumers into credit products that will generate more than triple the revenue.

Lenders will create incentives for “people to use credit cards instead of debit cards,” James Rohr, 62, chief executive officer of Pittsburgh-based PNC Financial Services Group Inc. (PNC), said during a July 20 conference call with analysts. Almost 1.1 billion credit-card offers were mailed in the second quarter, a 20 percent increase over the prior three-month period, according to market-research firm Synovate.

The caps, mandated by the Dodd-Frank Act, may reduce annual revenue at the biggest U.S. banks by $8 billion, data compiled by Bloomberg Government show. The cost to merchants won’t exceed 24 cents on an average debit ticket, replacing a formula that’s typically 1.14 percent of the purchase price, or 44 cents. Swipe fees for credit cards, which aren’t regulated, equal roughly 2 percent and generate about $40 billion a year.

A shift from debit to credit may erode expected savings for U.S. merchants who pay the swipe fees set by San Francisco-based Visa Inc. (V) and MasterCard Inc. (MA) U.S. consumers also took on more revolving debt in May, primarily credit-card balances.

New rules slash the amount that U.S. banks can charge for debit-card interchange fees to a high of 24 cents, down from 44 cents on average. Photo: David Paul Morris/Bloomberg Close

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New rules slash the amount that U.S. banks can charge for debit-card interchange fees to a high of 24 cents, down from 44 cents on average. Photo: David Paul Morris/Bloomberg

In May, revolving credit climbed $3.36 billion to $793.1 billion from an almost seven-year low of $789.8 billion in April, according to the Federal Reserve. The gain, the second since August 2008, equaled a 5.1 percent annualized increase.

Visa, MasterCard

Visa, the biggest payments network, said last week that U.S. credit-card purchases rose 9.8 percent to $224 billion in the quarter ended June, compared with a 5.9 percent growth in the same period last year. U.S. credit-card spending at No. 2 MasterCard rose 6.1 percent, compared with 1.1 percent in the second quarter of 2010, the Purchase, New York-based firm reported yesterday.

The transition from debit to credit may be slow as economic growth stagnates and unemployment remains above 9 percent, Visa CEOJoseph W. Saunders, 65, said in a July 6 conference call with analysts.

“It’s easy to talk about doing that, but the last time I checked we were still in a recession and in order to move transactions from debit cards to credit cards you have to be willing to give the credit to people,” Saunders said. “That will happen over time, but I don’t think it’s anything immediate.”

Fee Caps

The Fed capped debit fees at 21 cents per swipe. It will let issuers tack on 5 basis points of each transaction, or almost 2 cents based on the average debit ticket of $38, and a conditional 1-cent adjustment for lenders that follow certain fraud-prevention standards.

The limits, championed by U.S. Senator Richard Durbin, an Illinois Democrat, have spurred banks to curtail debit-card rewards programs and add fees for checking accounts.

Wells Fargo & Co. (WFC), the lender with the largest U.S. branch network and the second-biggest debit-card issuer after Bank of America Corp. (BAC), stopped enrolling customers in debit rewards and is testing a $3 monthly debit-card fee in some markets, according to Lisa Westermann, a spokeswoman. The firm predicted last month that the fee caps will reduce annual profit by about $1 billion.

“We expect to recapture at least half of this over time through volume and product changes,” Chief Financial Officer Timothy J. Sloan said during a July 19 conference call, without elaborating.

‘Can’t Wait’

Wells Fargo CEO John Stumpf, 57, said on the call that he “can’t wait to get a credit card in every one of our creditworthy customers’ wallets.”

JPMorgan Chase & Co. (JPM), the second-biggest U.S. bank by assets, ended debit perks for most customers in July. Regions Financial Corp. and SunTrust Banks Inc. also cut their programs.

Paul Hartwick, a spokesman for JPMorgan, said the lender isn’t encouraging cardholders to switch from debit to credit.

“Our aim is to give our customers clear reasons to do more business with us, regardless of what type of card they are using,” Hartwick said in an e-mail.

As banks stop offering debit-card customers perks such as cash-back bonuses and airline miles, lenders including JPMorgan and McLean, Virginia-based Capital One Financial Corp. (COF) are sweetening credit-card come-ons.

‘Very Competitive’

“Issuers are becoming very competitive in attracting consumers with high credit scores, and they are using the best reward offers we’ve seen in several years,” said Bill Hardekopf, CEO of LowCards.com and author of “The Credit Card Guidebook.”

JPMorgan last month offered 50,000 rewards points, enough for two round-trip flights, for new users of its Southwest Airlines Rapid Rewards Premier credit card, Hardekopf said in a July 13 e-mail.

The challenge for banks will be to develop products that “look and behave like a debit card,” said Moshe Orenbuch, an analyst at Credit Suisse Group AG. “If you were using a debit card before, whatever it is you liked about that card would need to be packaged into a credit card with similar features.”

Otherwise, lenders risk angering customers and driving them to one of about 7,500 smaller banks, those with less than $10 billion in assets, that are exempt from the debit caps, said Mallory Duncan, general counsel at the Washington-based National Retail Federation, which lobbied for the new rules.

Durbin’s Prediction

“Credit cards have always been a more lucrative vehicle of the banks and the networks,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association, an Arlington, Virginia-based trade group that represents merchants including Wal-Mart Stores Inc. and Target Corp. “Any effort by the banks and the networks to steer people toward credit will run headlong into a consumer that prefers debit cards over credit.”

Durbin, the architect of the debit caps, predicted in December that card issuers would seek to circumvent the legislation.

“The big banks and card networks are likely to start steering their customers away from traditional debit cards and toward less-regulated products,” Durbin wrote in a Dec. 21 letter to Elizabeth Warren, the Obama administration adviser who organized the Consumer Financial Protection Bureau.

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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