While Mercator Advisory Group has predicted continued GPR growth driven by increased adoption by FI’s in the wake of Durbin, FI’s must recognize that adoption across too broad a user base will place them in significant jeopardy with the new Consumer Financial Protection Bureau. Be extremely wary of any advice that argues for maximizing profitability at the expense of adhering to the very first paragraph of the legislation.
The legislative discussions that lead to the Durbin Amendment made it clear that the prepaid exemption was intended to benefit initiatives that target low and moderate income families. This becomes even more compelling when coupled to the additional fact that the very first paragraph of the amendment empowers the board to prevent circumvention or evasion.
“(1) REGULATORY AUTHORITY OVER INTERCHANGE TRANSACTION
FEES.—The Board may prescribe regulations, pursuant to section 553 of title 5,
United States Code, regarding any interchange transaction fee that an issuer
may receive or charge with respect to an electronic debit transaction, to
implement this subsection (including related definitions), and to prevent
circumvention or evasion of this subsection.”
Mercator Advisory Group suggests that targeting moderate to high transactors for prepaid adoption in light of these facts would be a decidedly poor business decision. While this approach would indeed maximize interchange income, it will also put the institution in the cross-hairs of regulators since the selection criteria will almost always select higher income individuals and families, and not the low and moderate income target that was the intent of the legislators.
Mercator Advisory Group has worked with several institutions that are evaluating prepaid as a mechanism to support turn downs and as a new entry level and low-end banking product. This will enable the institution to continue to offer “Free Banking” even as the Durbin Amendment eliminates the very profitability that enabled the “free” low-end checking accounts.
Financial institutions should consider how a new low-end checkless checking account that is based on prepaid technology can provide a viable replacement product for existing “free checking” products. Properly implemented, these new low-end product lines will fit seamlessly into the bank’s portfolio of banking products. The bank can then create fee structures on existing products that become unprofitable under Durbin that will move low balance customers to the new low-end checkless checking account that remains free.
Mercator Advisory Group trusts this approach falls in line with the legislative intent and will enable financial institutions to recover prepaid implementation costs while also enabling them to deliver high value financial services to individuals and families that are not currently able to maintain the average daily balance required to accommodate a free checking solution.