With all due apologies to Aerosmith:
Jamie’s got a gun
Jamie’s got a gun
His whole world’s come undone
He’s found that banking ain’t so fun
What did Fed daddy do?
Set interchange to point one-two
This rate will be contested
By banks inclined to complain
But man, they had it comin’
And now Jamie’s got a gun
Banking ain’t never gonna be the same.
The Jaime I’m referring to is Jamie Dimon (CEO of JP Morgan Chase), and I’m using him as a surrogate for all bank CEOs. And the gun I’m alluding to is not the bullet type of gun, but a pricing gun (that is what they call those things in supermarkets, isn’t it?).
But, to a certain point, the pricing gun could be a proxy for a real gun. Because if banks make poor “pricing” decisions as a result of the proposed interchange rate changes, they may very well shoot themselves in the foot.
While most observers agree that banks will end free checking, and possibly charge fees for debit card use, the situation isn’t so black and white. Many banks will follow BofA’s lead and establish fee structures that enable customers to “earn” their way out of paying fees through behaviors and balances.
Until now, incenting debit card usage has been a growing trend among many banks — and not just the largest ones, thanks to firms like BancVue with their RewardsChecking product, who focus on community banks and credit unions.
Conventional wisdom holds that banks will no longer incent customers to use debit cards, and even possibly levy fees for debit card use.
I think that would be a HUGE mistake. Here’s why:
1. No cents makes no sense. If the interchange rate on debit cards is taken down to $0.12 per transaction, then yes, banks will see a decline in revenue. But what are the alternatives? How much do they get per cash or check transaction? $0.00.
2. It’s not safe to stand in front of a moving train. The “moving train” I’m referring to is the growing use of debit cards among consumers. To a certain extent, increasing use of debit cards has come because of bank incentives to use these cards. But that doesn’t account for the total demand, or even the majority, I would argue. The use of debit cards is a generational phenomena — Gen Yers don’t carry cash, they don’t write checks, and they don’t have credit cards (or, more accurately, are shunning credit cards, because they’re smart enough to know that running monthly balances is not smart financial management). Dis-incenting customers to use debit cards by levying fees is only going to tick customers off more than they already are. The result: Customer attrition.
3. Debit card usage holds potential for additional services and alliances. Pundits are also calling for the death of rewards programs, which are funded by the interchange rate. I don’t think banks can afford to kill their rewards programs. Instead, to prove that politics makes strange bedfellows, banks will redesign their debit card rewards programs to be merchant-funded programs. And the key to enabling this is having a customer base that makes heavy use of debit cards in order to generated the data needed to help merchants and retailers improve their marketing effectiveness. This opportunity is lost if payment behavior transitions back to checks and cash.
So what should Jamie and other bank CEOs shoot with their gun?
The answer to the debit card interchange fee change is to kill checks as fast as humanly possible. Will this tick off many customers? Yes. Absolutely. No question about it.
Will it hurt the banks? No. Absolutely not. I have no question about that.
Thirtyish years ago, gas stations told customers they had to get out of their cars and pump their own gas. People whined, moaned, and complained. But did it. And got over it. And found that — except for when it’s really cold or raining — it’s actually a faster and better experience.
Same thing with checks. People will complain about the death of checks. But the infrastructure in place to process checks is a drag on bank profitability. And even though overall check volume is declining, the reality is that banks can’t dismantle this infrastructure. In other words, the fixed cost is high, and the variable cost is low. The only answer is to kill checks.
If the current volume of checks were to move to debit cards, the banks would recoup some of the lost interchange revenue, but not nearly all of it. But the faster that this happens, the faster that banks can capitalize on the potential synergies with retailers and merchants described in point #3 above.
And apologies to Steven Tyler for butchering his song.