While deposit service fees have been under pressure across the banking industry, interchange revenues on debit and credit cards have been steadily expanding, notes Sterne Agee.
Matthew Kelly and team at Sterne Agee in their report dated September 4, 2014, note the industry will continue to attempt to recapture the lost revenues from deposit service fees.
Drop in deposit service fees
The Sterne Agee analysts point out that deposit service fees are respectively down 1% and 2% since 2012 at super-regional and regional banks. As can be deduced from the following exhibit, while the industry has certainly seen a decline in this part of their consumer banking business, the country’s larger banks have fared much better.
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For instance, universal and super-regional banks having assets over $50 billion have seen deposit service charges as a percentage of revenue drop by 100 to 200 basis points since 2008. Citing an example, the analysts point out that TCB in the superregional space has witnessed a decline of close to 1250 bp over the last six years:
The Sterne Agee analysts note these revenue declines have been driven by changes in regulation such as Reg. E overdraft, changes in industry practice and technology improvements such as text and email balance alerts.
The analysts note community and regional banks were major players for whom the lost revenues have been painful and contributed to the overall decline in industry profitability since the financial crisis. The analysts also point out that the industry’s efforts to recapture these lost revenues have witnessed mixed results.
The analysts believe given a macro-trend in consumer behavior driving lower overdraft activity coupled with many of the low balance customers leaving the banking system, the downward trend on overdraft fees in particular could continue a bit longer.
Interchange revenue held up better
Unlike deposit service fees, positive trends were seen in interchange revenue. Despite getting hit in 2012 because of the Durbin amendment, interchange revenues have steadily grown over the past two years.
The Sterne Agee analysts point out that interchange revenues on debit and credit cards have been growing on an absolute basis, up 15% since 2012 for the superregional banks and up 7% for regional banks.
The SA report notes companies have enhanced their efforts to grow checking accounts and incentivize customers to swipe more often at merchants. The Sterne Agee analysts highlight that these efforts have started bearing fruit and the company is gradually recovering from the 2011 impact of the Durbin Amendment, which slashed interchange rates for banks greater than $10 billion in total assets. The following chart captures the strong performance posted by the top five super regional and regional banks: