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In anti-fee climate, banks quietly raise revenue elsewhere

By Andrew Dunn, McClatchy Newspapers –

CHARLOTTE, N.C. — Three months after banks scrapped plans for debit card fees, it’s becoming clearer how they intend to recoup money lost in the Dodd-Frank financial reform law.

Instead of one new fee, prepare to be sold more products, offered new service packages, lose debit rewards and face more fees in general.

Banks’ fourth-quarter earnings provided the first definitive look at what they lost after a cap took effect on the fees merchants pay banks when you use your debit card.

Combined, Bank of America Corp. and Wells Fargo & Co. reported losing nearly $800 million in lost swipe fee revenue in the fourth quarter. Regional banks felt a deep impact as well.

Across the industry, banks were on pace to lose the $6 billion that had been predicted.

So with debit card fees off the table, how will they make it up?

One way is by selling customers more products. Bank of America talks about “deepening relationships” with customers. Wells Fargo is focused on selling existing customers more products.

Mid-size banks have been a little more specific in their plans.

Fifth Third Bancorp is reducing rewards, bundling products together and pondering new fees. Regions Financial Inc. has launched new fee-based products like pre-paid cards and changed checking account requirements so that more carry fees.

“Fees have gone up across the board in the industry,” said bank analyst Dick Bove of Rochdale Securities. “That’s the only way they can get their money back.”

The cap on swipe fees, advocated by U.S. Sen. Richard Durbin, D-Ill., was touted as a boon to small businesses and consumers. After being adopted as part of Dodd-Frank, the Federal Reserve in June settled on a limit of about 21 cents per transaction, about half what the industry average had been.

Banks said that would cost them billions. Some Republican lawmakers and presidential candidates have vowed to repeal Dodd-Frank, calling it an overreach and a burden on businesses.

As the cap went into effect, several banks’ initial response was to announce plans for monthly fees on debit card use. Bank of America’s plan for a $5 fee drew the most notice, though Wells Fargo also began testing a $3 monthly fee and SunTrust Banks Inc. began charging customers $5.

The backlash was swift and severe. More than 300,000 signed online petitions decrying the fees, and even President Barack Obama called the fees a mistreatment of customers. By early November, most of the debit card fees were off the table.

That left the biggest banks in a political quandary: how to satisfy investors while avoiding the ire of a fee-sensitive public.

Even without a debit fee, Wells Fargo is on its way to making up the loss. While it is difficult to determine which changes are seasonal and which are strategic, Wells’ financial statements show that other categories helped make up for a $365 million swipe fee loss.

Credit card fee revenue increased in the fourth quarter. The bank said that was driven by new account growth on the East Coast as Wells completed its integration of Charlotte-based Wachovia. Revenue from “other fees” ticked up as well.

That doesn’t necessarily mean the fees themselves increased. The bank reported selling more checking accounts and credit cards, leading to higher fee revenue.

“Wells has kept their cards closer to the vest and has done what they need to do without making headlines,” said analyst Gary Townsend of Hill-Townsend Capital.

Wells Fargo declined to comment for this report, instead pointing to public statements its executives have made.

Bank of America, however, saw its income more affected by the swipe fee cap. It took the largest loss of its peers, $430 million, mainly because of the size of its business.

Bank of America’s noninterest income from deposits was down, as well as its overall revenue.

But as the bank works to cut expenses and trim back its retail operations, some analysts say Bank of America will have a harder time gaining customers to boost revenue.

“Companies like Wells or JPMorgan are investing in their businesses and are quite likely to be able to broaden and deepen their relationships with customers,” Townsend said. “Bank of America, on the other hand, is currently disinvesting in its businesses and shrinking. It’s hard to conclude that they can be very successful in an environment like this until they repair themselves and get back into a growth mode.”

Bank of America declined to comment except to point to public statements. Analysts believe Bank of America’s overall health was improved in the fourth quarter, as capital levels and liquidity increased significantly.

Some of the larger regional banks, with fewer lines of business to tweak, have felt the loss of swipe fee revenue more keenly.

Without being as large a political target, their executives have also been more explicit in how they will recoup some of that money. Still, analysts expect them to remain cautious about wading into significant new fees.

Fifth Third is lowering rewards and plans to add fees and bundle debit cards into packages with other services.

“We are being very deliberate in our actions,” said Fifth Third Chief Financial Officer Daniel Poston in a conference call with analysts. “We are consulting with our customers about their preferences for our services and how they pay for those services.

By the end of September, the bank plans to have made up two-thirds of the impact from lost swipe-fee revenue.

Regions Financial recently launched a package with more fee-based products and is back into the credit card business.

PNC Financial, which is expanding into new markets with the takeover of RBC Bank, says it is looking at various types of fees as well. It has already changed its checking product lineup in a way that highlights fee-based packages instead of free checking.

“We have to reprice our relationships with the consumers,” CEO Jim Rohr said on a conference call last month. “Some people have learned that you just don’t say, ‘OK, we’ll make it up with one new fee.’ I think you just have to look at the whole consumer relation.”

BB&T Corp., though, fared comparatively better. The bank reported losing about $36 million from the debit card rules, but executives have said little else about their strategy to make it up.

But with strong credit card and insurance fees, Bove, the analyst, said BB&T has already made up half of what it lost.

That would put BB&T ahead of the curve. Analysts say most banks will have recouped between 50 and 75 percent of the lost revenue by the end of 2012 or 2013.

To get there, analysts expect the years-long trend of increasing fees to march on. Whether it’s paying new fees or facing higher minimum balances, consumers will the ones paying more in the end, said Greg McBride, senior financial analyst at research firm

“The consumer is getting stuck with the costs.”



Below are reported losses in swipe fee revenue, according to fourth-quarter earnings reports.

—Bank of America Corp.: $430 million

—Wells Fargo & Co.: $365 million

—BB&T Corp.: $36 million

—Fifth Third Bancorp: $30 million

—SunTrust Banks Inc.: $42 million

—Regions Financial Corp.: $45 million

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