Is 2011 a transitional year for financial services?

Pivotal political and financial issues – from the regulatory environment to the state of the economy – may make 2011 a transitional year for the financial services industry. That was the theme of a March 1, 2011, TowerGroup webinar, which also touched on technology initiatives in bank cards.

The webinar featured presenters Brian Riley, Senior Research Director, Bank Cards, and Dennis Moroney, Research Director, Bank Cards, at TowerGroup.

Among the factors cited by Moroney and Riley as driving the need for the industry to adapt and innovate are diminished profitability, the development of regionalized payment networks, credit and fraud vulnerability, changing customer expectations, and business acquisition challenges.

Legislative influences

The webinar outlined initiatives required on the part of banks and payment vendors to meet the challenges, from business process re-engineering to launching of new card products. Regulatory and legislative measures influencing the industry's direction include the 2009 Credit Card Accountability, Responsibility and Disclosure (CARD) Act and 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

"The CARD Act has done what it was intended to do, and that was to impact a lot of the revenue streams that banks have come to rely on," Moroney said.

The Durbin Amendment to the Dodd-Frank Act requires the Federal Reserve Board to enact regulations that limit the amount of interchange fees banks can charge retailers on debit card transactions. Due to limits proposed in December 2010 by the Fed many "of the institutions are now moving away from promoting debit cards and are also charging fees to make up that lost revenue," Moroney said.

Shifting rewards and risks

Banks are also beginning to redefine what constitutes a profitable customer, Riley noted. He added that customers who typically made minimum payments due on credit card balances were the "perfect bread and butter of the business. … Today, you have to look at whether this [type of customer] is more risky: Why are they willing to pay me 16 percent, or in many cases 29 percent, as they revolve on these small balances?"

To recoup losses, some major banks are also experimenting with requiring a $1,200 minimum balance to qualify for a free checking account. "So the people who really end up at risk are low-income people that will be funding a lot of these transactions, which seems counterintuitive to the legislation," Riley said.

Additional challenges outlined by Moroney and Riley included the emergence of closed-loop debit networks using new POS technologies and the advent of person-to-person and mobile payment platforms. "All of these changes create vulnerabilities for financial risk and opportunities for financial reward," Moroney said.

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