Unlike some of their peers, Wells Fargo & Co., U.S. Bancorp and PNC Financial Services Group Inc. don't have to devote a hearty portion of their investor presentations these days to discussing mortgage repurchase requests.
That left more time Tuesday at Morgan Stanley financial services conference for the companies to grapple with another industry bogeyman — coming debit interchange fee restrictions.
"This is on a very fast track. I for one and others in the industry are trying to get this on the right track," said Wells Fargo Chairman and CEO John Stumpf, who estimates the proposed 12-cent-a-transaction cap would deprive Wells of as much as $250 million every quarter barring innovations to offset some of the losses.
"We're trying along with others in the industry to make customers aware and Congress aware that there might be a better way to do this."
U.S. Bancorp Chief Financial Officer Andy Cecere voiced similar complaints, and expanded on the company's recent pledge to recover half of the $400 million it expects the cap would cost the company.
Though U.S. Bancorp had intended to "move a little bit more slowly to continue to take market share and learn," the size of the cap made the bank's current program unsustainable even in the short term, Cicere said.
"When we cap that revenue at 12 cents per transaction, we're pricing it well below our cost. … And we actually (have to) act more rapidly because of that," he said.
The company would have liked to completely offset the revenue losses, he said, but it is aiming only to recoup half. "We're going to do that with a couple of changes. We're going to be more aggressive in terms of debit-pricing changes," he said, with the company looking at transaction fees and cutting back on rewards. "Secondly we're going to look at our deposit pricing, or checking pricing, and again try to mitigate some of these impacts."
Eric Grover, a principal in Minden, Nev., payments consulting firm Intrepid Ventures, said that even the most adept pricing and product changes — such as hybrid debit-credit products that could command more fees — would be unable to completely offset the large banks' lost revenue. Their small-bank competitors are exempt from the restrictions, and merchants will try to steer customers toward the least costly electronic payments.
"Debit networks and issuers can do some things to encourage consumers, but so can the retailers," he said in an interview.
Barring congressional action to overturn of the Durbin rule, he said, there was likely little that banks could do to dodge the hit. Because the Federal Reserve's mandate is to allow banks to repay themselves only for the actual cost of the interchange transaction, and not staffing, overhead and other fixed costs, getting regulators to significantly raise the 12-cent cap is unlikely, Grover said.
"Now that the Durbin amendment has been passed, we are hearing all these cries of 'Oh my god this is going to be terrible,'" he said. "But all the big banks were AWOL when it mattered, which was when the legislation was being debated."
One presenter at the conference, PNC Senior Vice Chairman William Demchak, argued that the "offset" approach championed by colleagues was likely not going to work.
"Every conference call you'll get on, there are presenters who will say they're going to make up 50% or 80% or a 100% of the changes associated with overdraft and interchange fees and they're going to add this fee and that fee and this fee," he said, arguing that the result would be customer and employee attrition.
Demchak swore that PNC would not alter its pricing for "short-term gains," describing a grand, if still somewhat vague, alternative centered on PNC's "virtual wallet" integrated financial management plan.
"What we're hoping is we can sell somebody a product that is a card — credit, debit, their preferred checking account and savings products — in the form and the technology they want to use it. And we spend a lot of energy getting that all linked together as an offering to take the entire wallet from the consumer," he said.
In addition to the comments on interchange, the presentations veered into other areas of public policy. Wells' Stumpf laid out a rough approach for how Wells would like to see Fannie Mae and Freddie Mac reformed, declaring that the government must offer an "explicit, not implicit" guarantee if it is to play a role.
"One way to think about this is that possibly the government should have a role as a catastrophic-risk provider, but have it structured in a way that we never could get there," Stumpf said. Though private capital and good underwriting could do most of the heavy lifting, he said, "I think you're going to need [a government backstop] to continue to have the secondary market work."
Stumpf gave lesser billing to the prospects of reconfiguring mortgage-servicing fees. The amount of capital tied up in servicing is not currently a concern for Wells, he said, and much of the early discussion boils down to "how you get paid," he said. "You get more (at the time of) sale and less on servicing which has strengths and weaknesses or benefits and risks to it."
While attendees at the conference directed industry policy and strategy questions to Wells, PNC, and U.S. Bancorp, a session by Regions Financial Corp. was a reminder that analysts and investors haven't lost interest in credit issues and the repayment of government investments.
Grayson Hall, president and chief executive, reiterated that two things need to happen before the Birmingham, Ala., bank pays back the money it received as part of the Troubled Asset Relief Program: a return to sustainable profitability and a substantial improvement in credit.
"We believe we are positioned well to do that," he said. "We just have to deliver. We clearly are in prove-it mode."
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