SuThe Impact of Debit Card Regulation on Checking Account Feesllivan

8/13/2019 SuThe Impact of Debit Card Regulation on Checking Account Feesllivan

1/36

The Impact of Debit CardRegulation on CheckingAccount Fees

By Richard J. Sullivan

In 2010, when Congress authorized the Federal Reserve to cap the

fees paid to banks for debit card transactions, some news reports pre-dicted the banks might react by increasing checking account fees.

The cap on debit card fees reduced revenue significantly for some banks,

and the concern was that they might seek to offset their losses by raisingmore revenue from checking accounts. In fact, in recent years, manyof the large banks bound by the new debit card regulations have raisedtheir checking account fees. But thousands of smaller banks that were

exempted from the regulations have taken varying approaches to check-ing account fees. Some have raised the fees. Others have lowered them.

The net effect on consumers has remained an open question. After

the imposition of debit card regulations, have changes in checking ac-count fees benefited or hurt bank customers? What factors drove somebanks to change their fees and others not? Were competitive forces im-

portant in the banks decisions?This article examines broad samples of regulated and exempt banks,

compares their fee structures before and after the imposition of debitcard regulations, and finds thaton netconsumers actually had in-creased access to free checking after the debit card regulations went intoeffect in late 2011. Regulated banks were more likely to raise checking

account fees, but exempt banks were more likely to reduce or eliminate

Richard J. Sullivan is a senior economist at the Federal Reserve Bank of Kansas City.This article is on the banks website atwww.KansasCityFed.org.

5Page numbering will change upon this articles inclusion in the coming issue of the Economic Review.


2/36

6 FEDERAL RESERVE BANK OF KANSAS CITY

fees. Thus, consumers net increase in access to free checking stemmedmainly from the greater availability of free checking at exempt banks. At

some banks, both regulated and exempt, there were also other changesin the terms of the checking accounts offered to consumers. This articlefinds evidence that access to free checking has expanded most in citiesand regions where banks are engaged in vigorous competition: banks in

such markets may offer free checking to attract customers from otherbanks or to ensure retention of their own established customers.

Section I describes the potential for debit card regulations to drive

changes in checking account fees and outlines an approach to assess-ing what changes actually occurredcomparing data from before andafter the regulations were imposed. Section II examines the changes in

checking account fees that have occurred and explores banks decisionson whether to offer unconditional free accounts or conditional free ac-counts for which customers must meet certain terms and conditions

to avoid fees. Section III examines the market characteristics, financialfactors, and competitive conditions that may have driven changes inchecking account fees.

I. DEBIT CARD PAYMENTS, BANK ACCOUNTSERVICES, AND INTERCHANGE FEES

The changes in checking account fees that took place from 2011to 2012 came after a decade of striking developments in the debit cardmarket. Debit card use from 2000 to 2009 had soared from 12 percent

to 39 percent of all noncash retail transactions, even as the number ofthose transactions swelled from 72 billion to 104 billion per year (Sul-livan 2012). Over the same period, debit card networks sharply raised

the fees charged to merchants for processing transactions. The largestshare of these fees, known as interchange fees, is passed on by thenetworks to the banks that issue debit cards. Interchange fees increased

33 percent from 2000 to 2011, rising from an average of 36 cents to anaverage of 48 cents for a $40 transaction.1

Merchants raised concerns about the rise in interchange fees and

subsequently, Congress passed the Dodd-Frank Act of 2010, whichincluded a cap on interchange fees.2The cap took effect in October

2011.3 Congress exempted smaller banksbanks with parent com-panies having less than $10 billion in total assetsfrom the cap, but

Page numbering will change upon this articles inclusion in the coming issue of the Economic Review.


3/36

ECONOMIC REVIEW FORTHCOMING 7

larger banks were bound by the cap and experienced immediate lossesof revenue. For the regulated banks, the average interchange fee (count-

ing fees for transactions of all sizes) quickly dropped from 50 cents to 24cents per transaction (Hayashi 2012). Annual revenue from interchangefees dropped for all regulated banks by an estimated $8 billion (Wang).4

The reaction of banks to regulated interchange fees

Amid uncertainty about how regulated banks would react to these

revenue losses, some banking industry observers predicted a rise inchecking account fees and widespread elimination of free checking ac-counts for consumers. Other observers predicted survival of free check-

ing at small banks.5Both predictions are defensible because a variety of factors influence

how commercial banks manage the pricing and costs of checking account

services.6Although the loss of revenue from interchange fees is one keyfactor, other factors also influence prices, including: the characteristics ofthe regional market in which a given bank operates; the financial char-

acteristics of the individual bank itself; and the nature of the industrycompetition faced by the bank. For example, in regional markets that are

growing in size and affluence, banks may place a higher value on gainingmarket share than on increasing account fees. Individual banks financialcharacteristics, such as their access to funding or the level of demand fortheir loans, may affect those banks decisions on whether to raise account

fees.7And the nature of the competition faced by banks within their re-gional market may influence whether they are inclined to raise fees at therisk of losing price-sensitive customers to rivals.

Numerous factors influence banks management of checking account

products and their reactions to interchange fee caps have not been uni-form. Loss of interchange fee revenue is likely to lead some regulated

banks, but not all, to raise account fees. While interchange fee regulationdoes not apply to exempt banks directly, it may have had an indirect ef-fect on the pricing of some checking account products. After a regulated

bank raises its checking account fees, rival banksincluding exemptbanksmay follow with their own fee increases because they perceiveless risk of losing customers. Conversely, an exempt bank may react by

lowering its own account fees in a competitive move to attract customers.


4/36


The before-and-after method used to analyze checking accountrequirements and fees

In studying how commercial banks reacted to the regulation ofdebit card interchange fees, this article examines separate samples of

regulated and exempt banks. The analysis compares consumer checkingaccount, financial, market, and competitive characteristics of samplebanks before and after interchange fee caps went into effect. The first set

of data on fees and requirements of banks consumer checking accountswas collected in March and April 2011, at least five months before feeswere regulated. A second set of data was collected in April to June 2012,

six months or more after fees were regulated.A criticism of this before-and-after method is that other factors may

account for the changes it uncovers. A potential complication in the case

of deposit services was a change in regulations, effective July 21, 2011,that allowed banks to pay interest on business checking accounts.8Thischange may account for a surge of checking account balances, which in

2011 increased 35 percent at commercial banks.9The banks new ability to pay interest on business checking ac-

counts most likely caused the large increase in overall checking accountbalances rather than interchange fee regulation. In a recent survey oncorporate payments, less than 5 percent of 484 respondents used oraccepted debit cards in transactions with suppliers or other businesses

(Association for Financial Professionals). Moreover, because businesschecking accounts are tied to a broad range of servicespayroll, wirepayments, and bill payment processingfree checking or minimum

balances may have little relevance.The emergence of interest payments for business checking accounts

complicates the analysis of trends in checking account services in two

ways. First, the surge in business checking account balances makes itdifficult to detect whether consumers shifted their checking accountbalances from banks with free checking to banks without free checkingbecause the information about checking account balances mixes con-

sumer and business checking accounts. Second, most business check-ing account balances are held in larger, regulated banks.10As a result,the ratio of business deposits to total checking account deposits likely

increased, and the increase was likely greater at regulated banks than


5/36


at exempt banks. The analysis below offers a method for isolating the

trends in consumer accounts from the trends in business accounts.

For several reasons, despite the challenges posed by the nature ofthe available data, the before-and-after assessment used in this article

can help identify what changes in checking account fees were causedby interchange fee regulation. First, the imposition of interchange feeregulation itself defines the distinction between regulated and exempt

banks considered in the analysis. Second, although many factors mayhave some effect on how banks price their deposit services, the inter-change fee cap was a major contributor to the differences observed be-

tween regulated and exempt banks in their adjustments to the termsand fees of checking accounts. Finally, the regulation of interchange feesfor debit card payments is the only distinct, major event in 2011 that

directly and substantially affected banks revenue from consumer check-ing account services.

II. AVAILABILITY AND COST OF COMMERCIAL BANKCHECKING ACCOUNTS

Analysis of checking account requirements and fees at regulated andexempt commercial banks shows some banks raised fees while othersreduced them. Change was relatively uniform among regulated banks,

which mostly raised fees on checking accounts. Many exempt banks

changed their account offerings, however, and while some increasedconsumer fees, others reduced them. On balance, more exempt banksreduced fees, more than offseting the impact of regulated banks rais-

ing of fees. On net, the changes resulted in increased availability of freechecking accounts.

This section first discusses sample data on requirements and fees for

checking accounts. It then examines the requirements and fees of twotypes of free checking accounts, unconditional and conditional.11

Sample data and general characteristics of banks

Sample banks are drawn from all 6,389 commercial banks with non-

zero checking account deposits at year-end 2010 (Table 1).12The totalpopulation of banks had checking account deposits of $946 billion. In2010, 163 of these banks were subject to interchange fee regulation and


6/36


Table 1

CHARACTERISTICS OF REGULATED AND EXEMPT

COMMERCIAL BANKS, 2010Sample All Banks

Characteristic Regulated Exempt Regulated Exempt Total

Number 41 240 163 6,226 6,389

Total size Total (billions)

Total deposits $5,510 $92.7 $6,692 $1,635 $8,327

Checking accounts $548 $15.4 $652 $294 $946

Percent

Share of total checkingaccount deposits at all banks 58 1.6 69 31 100

Average size Average (millions)

Assets $191,451 $468 $59,806 $319 $1,836

Total deposits $134,402 $386 $41,058 $263 $1,303

Checking accounts $13,377 $64 $4,002 $47 $148

Percent

Checking accounts/assets 8.35 20.6 9.23 22.2 21.8

Return on assets 0.55 0.36 0.83 0.28 0.30

Metro location 97.6 55.4 93.3 50.8 51.9

Notes: Banks are grouped according to whether their debit card interchange fees are regulated or exempt fromregulation. The sample banks in the regulated group are a non-random sample and the banks in the exempt groupare randomly selected from all exempt banks. All statistics in this table are for year-end 2010.Sources: Call Reports, FDIC Summary of Deposits, author calculations.

6,226 were exempt. The shares of checking account deposits at regu-lated and exempt banks were 69 percent and 31 percent, respectively.

The regulated sample includes 41 banks from a list of 100 top is-

suers of debit cards in 2010 (Nilson 2010a; Nilson 2010b).13Banks in

the regulated sample include many of the largest banks in the UnitedStates. The exempt sample contains 240 banks randomly selected from

all exempt commercial banks. For each sample bank, fee informationand requirements for various noninterest checking account products

was obtained directly from the banks website.

The 41 banks in the regulated sample held $548 billion, or 58percent, of all checking account deposits at year-end 2010 (Table 1).By contrast, the 240 banks in the exempt sample combined held $15.4

billion, or 1.6 percent of all checking account deposits.The sample banks have some differences compared with the groupsfrom which they are drawn (Table 1). Average assets of the sample of


7/36


regulated banks were $191 billion at year-end 2010, much higher thanthe average of $59.8 billion for all regulated banks. The sample of regu-

lated banks had a low return on assets (0.55 percent) compared with allregulated banks (0.83 percent). Average assets of banks in the exemptsample were $468 million, modestly larger than the average of $319million for all exempt banks.

Despite these differences, the samples are likely indicators of howall regulated and exempt commercial banks reacted to interchange feecaps. While the sample of regulated banks is not randomly selected, its

members held a substantial majority of all checking account depositsat commercial banks.14The banks in the exempt sample are slightlylarger, on average, than all exempt banks but nonetheless have similar

characteristics, including size and geographic distributions, comparedwith all exempt banks.

Additional discussion about Table 1 and the samples of exempt and

regulated banks is in Appendix 1.

The availability of free checking accounts for consumers

The defining attributes of a free checking account are that it in-volves no monthly fees, no minimum balances, and no per-check

charges. The accounts typically have other requirements and fees, suchas opening-balance requirements, fees for ATM services, and penaltyfees for insufficient funds, but these fees are either minimal or are com-mon to all accounts.

The availability of free checking accounts for consumers changedboth among regulated banks and among exempt banks after the imple-mentation of interchange fee regulations. The share of banks in the reg-

ulated sample offering free checking accounts declined sharply from 51percent in 2011 to 27 percent in 2012 (Chart 1). By contrast, amongbanks in the exempt sample, the share offering free checking rose from

37 percent in 2011 to 44 percent in 2012. Although the percent declinein the offering of free checking among regulated banks was much larg-er than the percent rise among exempt banks, the number of exempt

banks in the sampleand in the United States as a wholefar exceedsthe number of regulated banks. The relatively small increase in the pro-

portion of exempt banks offering free checking had an outsized effecton the overall availability of free checking to consumers, as described ingreater detail below.


8/36


9/36


Table 2

CHANGE IN OFFERS OF FREE CHECKING TO

CONSUMERS, 2011-12No Change Added Dropped

Free CheckingAccounts in 2011

Yes No No Yes

Free CheckingAccounts in 2012

Yes No Yes No

Sample Number Share Number Share Number Share Number Share

Regulated banks 10 24% 19 46% 1 2% 11 27%

Exempt banks 34 14% 80 33% 71 30% 55 23%

Notes: Offers of free checking accounts are as of spring 2011 and spring 2012. The bank accounts in this samplehave no monthly fees or monthly balance requirement. They may have a minimum opening balance requirementand will also be subject to fees such as for ATM withdrawals or cases of nonsufficient funds. Banks in this table aregrouped by whether their debit card interchange fees are regulated or exempt from regulation. The shares shownfor each type of bankregulated and exemptare the percentage of banks of the given type that followed the patternas indicated, from 2011 to 2012, of change or no change in the offering of free checking accounts. There are 41regulated and 240 exempt banks in the sample.Source: Authors calculations.

that it operates in a larger geographic area. If the total value of checking

account balances in all banks offering free checking accounts increases,consumers can more easily access free checking.

By dollar value, consumer access to free checking increased from2011 to 2012. The footprint of all commercial banks that offered con-

sumers free checking accounts increased from an estimated $184 bil-lion in 2011 to $278 billion in 2012 (Table 3).15The share of checkingaccount balances in banks that offer free checking out of all checking

account balances rose from 19.4 percent to 21.6 percent.Some of the increase shown in Table 3 in checking account bal-

ances held by banks offering free checking may relate not to consumer

checking but to business checking accounts that began to pay interest.These interest payments may have altered the composition of check-ing account balances, by increasing business account balances relative

to consumer account balances and by increasing the balances held byregulated banks relative to those held by exempt banks.

A counterfactual calculation can be used to account for this likely

change in the composition of checking account balancesand to fo-cus narrowly on the change attributable to consumer accounts, as op-

posed to business accounts. Assuming that the growth of deposits atregulated banks in 2011 was equal to that of exempt banks, the 2011


10/36


surge in deposits at regulated banks is eliminated and the ratio of con-sumer deposits to total deposits is held closer to historical averages. Inthis calculation, out of all checking account balances in total, the share

held by banks offering free checking rose from 19.4 percent in 2011 to25.3 percent in 2012, a larger increase than that found in Table 3 (see

Appendix 2 for details on this calculation). This suggests that interest

payments on business checking accounts affected the size, but not thedirection, of the estimated change in the share of checking accounts

held by banks offering free checking.

Conditional free checking accounts: availability and cost

Conditional free accounts are another common type of checking

account. Customers avoid monthly fees by meeting specific require-ments, typically a balance requirement, a usage requirement, or both abalance and usage requirement. Typical balance requirements may in-

volve either a minimum daily balance or a minimum average balance,

or both. Usage requirements may involve either minimum numbers ofdebit card payments or an automated deposit with a minimum dollar

Table 3

CHECKING ACCOUNT BALANCES AT ALL BANKS WITH

FREE CHECKING, 2011-12

Notes: Estimates of checking account balances in all banks that offer free checking shown in this table are extrapo-lated using statistics from the samples of regulated and exempt banks. See Appendix 2 for details. Offers of freechecking accounts are as of spring 2011 and spring 2012. Aggregate values of checking accounts are as of year-end2010 and year-end 2011. The bank accounts in this sample have no monthly fees or monthly balance require-ment. They may have a minimum opening balance requirement and will also be subject to fees such as for ATM

withdrawals or cases of nonsufficient funds. Banks in this table are grouped according to whether their debit cardinterchange fees are regulated or exempt from regulation.Sources: Call Reports, FDIC Summary of Deposits, authors calculations.

2011 2012

billions

All bank checking account balances $946 $1,285

Balances in banks that offer free checking

Regulated banks $138 $96

Exempt banks $46 $182

Total $184 $278

Share of total in all bankchecking account balances

19.4% 21.6%


11/36


value, or both. As with free accounts, conditional free accounts typi-

cally involve an opening balance requirement or fees such as for ATMuse or for insufficient funds.

The availability of conditional free accounts increased among

banks in the regulated sample and declined among banks in the ex-

empt sample. Banks in the regulated sample that offered conditionalfree accounts increased 17 percent, from 26 banks in 2011 to 33 banks

in 2012 (Table 4). In the exempt bank sample, banks offering condi-tional free accounts fell from 173 in 2011 to 148 in 2012, a declineof 10 percent. Given the results from free checking account products,

some regulated banks likely shifted from unconditional to conditionalfree accounts while the reverse was likely at exempt banks.

Changes in the requirements on conditional free accounts were

mixed across banks. Some banks increased usage or balance require-ment while others lowered them (Table 5). Whether the change is im-portant to consumers depends on how they use their account.

Table 4

AVAILABILITY OF CONDITIONAL FREE CHECKING

TO CONSUMERS, 2011-12Banks Offering Conditional Free Checking Accounts

2011 2012Change

2011 to 2012

Sample Number Share Number Share Number Share

Regulated banks 26 63% 33 80% +7 +17%

Balance requirement 5 8% 3 7% -2 -5%

Usage requirement 7 17% 4 10% -3 -7%

Balance and usage requirement 20 48% 31 74% +11 26%

Exempt banks 173 72% 148 62% -25 -10%

Balance requirement 33 14% 75 31% +42 18%

Usage requirement 113 47% 40 17% -73 -30%

Balance and usage requirement 72 30% 64 27% -8 -3%

Notes: Free checking conditions are as of spring 2011 and spring 2012. The bank accounts summarized in thistable have conditions that, if met, will result in no monthly fee for a checking account. Conditions can be a mini-mum daily balance, a minimum average balance, one or more direct deposits to the account, a minimum numberof debit or other transactions and other conditions such as an all-electronic account or monthly bill payments.Some accounts require more than one of these requirements. They may also have a minimum opening balancerequirement and be subject to fees such as for ATM withdrawals or cases of nonsufficient funds. Banks in this tableare grouped by whether their debit card interchange fees are regulated or exempt from regulation. The shares in thetables are the percent of the total observations whose debit card interchange fees are either regulated (41 banks) orexempt from regulation (240 banks).Source: Authors calculations.


12/36


Table 5

REQUIREMENTS AND FEES ON CONDITIONAL FREE

CHECKING FOR CONSUMERS, 2011-12

*A plus or minus indicates that the change from 2011 to 2012 increased or decreased the consumers cost of the account**If requirements not metNotes: Fees and requirements are as of spring 2011 and spring 2012. Cells of the table report the average values of condi-tions or fees for accounts offered by sample banks. At least one, and possibly more, conditions are required. Accounts chosenfor this table are appropriate and available for average customers. For some banks, more than one account may be coded. Banks

with special features that are available only to specific groups of customers (students, military, retired, etc.) are excluded. How-ever, the accounts in this table may adjust fees or conditions for specific groups. Banks are grouped by whether their debit cardinterchange fees are regulated or exempt from regulation. The 41 total banks in the regulated group is a non-random sample

and the 240 total banks in the exempt group is a random sample from all exempt banks.Source: Authors calculations.

Sample

Regulated Exempt

Type of account /condition

Average feeor requirement

Effect on costof account due

to 2011 to2012 change

in fee orrequirement*

Average fee orrequirement

Effect on costof account due

to 2011 to2012 change

in fee orrequirement*2011 2012 2011 2012

Balance requirement

Min. opening balance $70 $33 - $99 $123 +

Min. daily balance $2,025 $1,550 - $588 $421 -

Min. average balance $6,000 $15,000 + $1,250 $422 -

Monthly fee** $15 $16 + $7 $6 -

Usage requirement

Min. opening balance $65 $37 - $80 $92 +

Direct deposit $25 $175 + $45 $1 -

Debit card transactions 1 2.3 + N/A 9.4 N/A

Monthly fee** $8 $6 - $7 $6 -

Both requirements

Min. opening balance $71 $80 + $137 $89 -

Min. daily balance $870 $1,656 + $452 $358 -

Min. average balance $1,532 $1,891 + $1,114 $489 -

Direct deposit $158 $152 - $0 $44 +

Debit card transactions 3.2 3.0 - 15 3.2 -

Monthly fee** $7.99 $7.61 - $7 $6 -

Number of conditions where the 2011-12 changein the average fee or requirement:

Increases the consumers cost 7 3

Decreases the consumers cost 7 10


13/36


For consumers who cannot meet a minimum balance, for exam-ple, the most important fee may be the resulting monthly charge on

the account. The average monthly fee for an account with only a bal-ance requirement among banks in the regulated sample increased from

an average of $15 in 2011 to $16 in 2012, potentially making themmore costly to consumers. But the average monthly fee in the otherfive type-of-account and sample combinations of the conditional free

accounts shown in Table 5 declined from 2011 to 2012, indicating lesscost to consumers. The overall picture on monthly fees suggests lowercost to consumers.

Another example of a change in a requirement had a neutral effecton potential consumers cost of conditional free checking accounts.The average opening-balance requirement increased from 2011 to

2012 in three of the type-of-account and sample combinations anddecreased in the other three combinations. For consumers, the samplesuggests little change in the minimum opening balance requirements

of conditional free checking accounts.One simple method of summarizing the overall changes to condi-

tional free accounts for consumers is to tally the number of changes in

average fees or requirements that either increased or decreased the costof the account. For each type of account and each account require-ment, Table 5 shows whether changes from 2011 to 2012 would in-

crease, indicated with a plus sign, or decrease, indicated with a minussign, the cost to the consumer of the account. Across the three subcat-egories of conditional free accounts in Table 5, there are 14 types of

fees or requirements. The last two rows of Table 5 show a tally of theeffects across all accounts and requirements.

By this method, the cost of conditional free accounts did not sig-nificantly change at regulated sample banks, but they fell at banks inthe exempt sample. Banks in the regulated sample increased the costof checking accounts in seven and decreased the cost in seven account

requirements or fees. Banks in the exempt sample increased the costof checking accounts in three and decreased the cost in 10 accountrequirements or fees.

Another indicator of the cost of conditional free checking is the

numberof requirements to be met to attain free checking. More re-quirements are harder to meet and thus may more easily result in


14/36


a monthly fee. As shown in Table 4, 48 percent of regulated bankshad conditional free accounts with balance and usage requirements in

2011, with this share rising in 2012 to 74 percent. By contrast, only14 percent of exempt banks had conditional free accounts with balanceand usage requirements in 2011, and although the share rose in 2012,it rose only to 31 percent.

From 2011 to 2012 regulated banks moved to accounts with morerequirementsand thus accounts that were likely more costly for con-sumerswhile exempt banks moved to accounts with fewer require-

ments. In fact, in 2012, the most common type of conditional freeaccounts among banks in the exempt sample were accounts that hadonly a monthly balance requirement, making it relatively easy for most

consumers to avoid monthly fees.Finally, there is little evidence in the samples that regulated or ex-

empt banks increased fees that are common to all accounts. Fees for

nonsufficient funds collected from 26 regulated and 59 exempt banksin the samples show, on average, little change. The average for banksin the regulated sample was $31.15 in 2011 and $32.30 in 2012. For

banks in the exempt sample, the average was $28.52 in 2011 and

$28.49 in 2012. For all sample banks, total revenue from ATM feesand account service charges did not increase appreciably during 2011

and 2012 (Chart 2).16

Summary of changes in free checking and conditional free checking

Information from samples of exempt and regulated banks suggeststhat free checking became more available to consumers after inter-change fee regulation went into effect. Free checking was less available

at regulated banks but more available at exempt banks. The share ofchecking account balances in banks that offer free checking rose to anestimated 21.6 percent in 2012, up from 19.4 percent in 2011. Con-

ditional free account products became more expensive and complex atregulated banks and less expensive and complex at exempt banks.

III. FACTORS AFFECTING THE PRICING OFCHECKING ACCOUNTS

Regulation of interchange fees on debit card transactions was un-likely to be the only factor in the decision of banks to change require-

ments and fees for checking accounts. Economic forces also may have


15/36


Chart 2

OTHER REVENUE FROM DEPOSIT ACCOUNT SERVICES

FOR SAMPLE COMMERCIAL BANKS

Source: Call Reports.

$20

$40

$60

$80

$100

$100

$200

$300

$400

$500

2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 2012:Q3 2012:Q4

ThousandsThousands

A: ATM Fees

$200

$400

$600

$800

$2,000

$4,000

$6,000

$8,000

2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 2012:Q3 2012:Q4

ThousandsThousands

B: Service Charges on Deposit Accounts

Exempt banks(right scale)

Regulated banks(left scale)

Regulated banks

(left scale)

Exempt banks(right scale)


16/36


influenced banks pricing decisions. This section examines market, fi-nancial, and competitive characteristics that shaped the incentives of

commercial banks in pricing their checking account services.To identify key characteristics, this section compares the group of

banks that added free checking accounts to the group that droppedthem. Adding or dropping free checking is a major change, and banks

that did so most likely faced strong incentives. Studying the conditionsunder which the two groups made different decisions may identify fac-tors that affected the decisions.

The effect of competition is important to bank customers and

policymakers because a banks ability to increase checking account feesdepends on the competition it faces in the market (Hayashi 2012). Ex-

empt banks, for example, may determine that their best strategy is tolower the costs of their checking accounts to attract new customers,some of whom may be upset with fee increases at their current bank.17Regulated banks may be reluctant to raise fees if the increase will cause

checking account customers to move to a bank with lower fees.This section focuses primarily on exempt banks because the sample

of exempt banks is large and representative of all exempt banks. For

comparison, the section briefly discusses results for banks in the regu-lated sample.

Banks in the exempt sample

Market characteristics.The characteristics of a local market will de-termine its attractiveness to a bank and thus affect how aggressively thebank prices account services. In particular, a bank in a large, growingand affluent area may be more successful establishing and retaining a

customer base.Market characteristics that differ statistically between exempt banks

that added or dropped free checking accounts include location in a met-

ropolitan area and per capita income (Table 6).18The large populationin a metropolitan area may make it easier to attract new customers. Ahigh per capita income signals a greater proportion of the population

that would use bank account services. A 67.7 percent share of banks inthe exempt sample that added free checking are located in metropoli-

tan areas, compared with 41.8 percent of banks in the exempt samplethat dropped free checking. The per capita income in the markets of


17/36


banks in the exempt sample that added free checking is $22,943, com-

pared with $21,213 in the markets of banks in the exempt sample thatdropped free checking.

Average deposits per person is slightly higher in markets wherebanks added free checking than in markets where banks dropped theseaccounts, but the difference is not statistically significant. Net migra-tion, a measure for new local demand for checking accounts, is not

statistically different in the markets where exempt banks dropped oradded free checking.19The share of working population (ages 18 to 64)or the share of the population with at least a high school education,

thought to reflect the attractiveness of a market to a bank, also are not

statistically different across banks that added or dropped free checking.Financial characteristics. Compared with the exempt banks thatdropped free checking, those that added free checking are larger,

Table 6

MARKET CHARACTERISTICS OF BANKS THAT ADDED

OR DROPPED FREE CHECKINGBanks in the exempt sampleAdded Dropped

Free Checking Accounts in 2011

Free Checking Accounts in 2012

No Yes

Yes No

Number of banks 71 55

Market characteristics (average)

MSA location*** 67.6% 41.8%

Net migration 0.164% 0.158%

Population aged 18 to 64 62.3% 61.7%

Share of population with at least a high school education 84.5% 85.5%

Per capita income** $22,943 $21,213

Deposits per person $26,390 $20,760

*Significant at 10 percent level**Significant at 5 percent level***Significant at 1 percent levelNotes: Statistical significance is based on a two-tailed test across the added and dropped banks that rejectsthe null hypothesis of equal means at 10 percent, 5 percent, and 1 percent levels, respectively. Only commercialbanks are included in this table. Market characteristics are for 2010. Metropolitan Statistical Area (MSA)

location is for the market in which the bank is headquartered. For single-market banks, market characteristicsother than MSA location (net migration and population) are for its market in which it is headquartered. Formultimarket banks, market characteristics other than MSA location are averages of characteristics of individualmarkets that the bank may serve, with weights determined by the share of the banks deposits that are located ineach of the individual markets.Sources: Census Bureau, Bureau of Economic Analysis, authors calculations.


18/36


depend less on checking accounts to fund their loans, and have a higher

proportion of assets in loans (Table 7). Checking account deposits av-eraged $108.5 million for banks in the exempt sample that added freechecking, compared with $22.1 million for banks in the exempt sample

that dropped free checking. The ratio of checking deposits-to-total as-sets is significantly lower for banks that added free checking (16.9 per-cent) than for banks in the exempt sample that dropped free checking

(23.9 percent). The ratio of loans-to-assets is 67.7 percent for banks

that added free checking, significantly higher than the 61.9 percentfor banks in the exempt sample that dropped free checking. Banks that

added free checking appear to have had relatively strong demand forloans and relatively low levels of checking account balances. Addingfree checking may help such banks fund additional loans.

Profitability of lending operations, measured by net interest margin, isnot statistically different for banks that added or dropped free checking.20

Competitive characteristics.Competitive pressure may also influence

a banks decision to add or drop free checking. One standard measureof competitive pressure is the Herfindahl-Hirschman index (HHI),

Table 7

FINANCIAL CHARACTERISTICS OF BANKS THAT

ADDED OR DROPPED FREE CHECKINGBanks in the exempt sample

*Significant at 10 percent level**Significant at 5 percent level***Significant at 1 percent levelNotes: Statistical significance is based on a two-tailed test across the added and dropped banks that rejects thenull hypothesis of equal means at 10 percent, 5 percent, and 1 percent levels, respectively. The banks in this tableare those that added or dropped free checking from a random sample of 240 exempt banks. Financial characteris-tics are for year-end 2010.Sources: Call Reports, authors calculations.

Added Dropped

Free Checking Accounts in 2011 No Yes

Free Checking Accounts in 2012 Yes No


Financial characteristics (averages)

Checking account deposits (millions)*** $108.5 $22.1

Checking account deposits / total assets*** 16.9% 23.9%

Total deposits (millions) *** $673.0 $75.6

Loans / total assets** 67.7% 61.9%

Net interest margin 3.65% 3.64%


19/36


20/36


Table 8

COMPETITIVE CHARACTERISTICS OF BANKS THAT

ADDED OR DROPPED FREE CHECKINGBanks in the exempt sample

Added Dropped

Free Checking Accounts in 2011 No Yes

Free Checking Accounts in 2012 Yes No

All Banks


Competitive characteristic (averages)

Deposit concentration (HHI)*** 1,368 1,948

Banks market share*** 3.61% 9.05%

Regulated banks market share*** 45.3% 32.1%

At least one sample regulated bank in themarket dropped free checking**

76.1% 60.0%

Banks in Metropolitan Locations



Deposit concentration (HHI) * 1,096 864

Banks market share* 2.10% 1.17%Regulated banks market share 55.7% 53.9%

At least one sample regulated bank in themarket dropped free checking

79.2% 87.0%

Banks in Nonmetropolitan Locations



Deposit concentration (HHI) *** 1,937 2,728

Banks market share** 6.77% 14.7%

Regulated banks market share* 23.3% 16.4%At least one sample regulated bank in themarket dropped free checking**

69.6% 40.6%

*Significant at 10 percent level**Significant at 5 percent level***Significant at 1 percent levelNotes: Statistical significance is based on a two-tailed test across the added and dropped banks that rejects the nullhypothesis of equal means at 10 percent, 5 percent, and 1 percent levels, respectively. Competitive characteristics are for

June 2010. For banks that operate in more than one market, the competitive characteristic is a weighted average acrossthe markets with weights equal to the share of the banks deposits in each market. The HHI (Herfindahl-Hirschmanindex) ranges from zero to 10,000 and becomes large when a market is more concentrated (output is controlled byfewer suppliers), is a commonly used measure of market concentration.Sources: FDIC Summary of Deposits, authors calculations.


21/36


higher than the 1,937 HHI of banks that added free checking. In addi-tion, banks that dropped free checking had a larger market share than

banks that added free checking. The market share of banks that droppedfree checking (14.7 percent) is statistically higher than that of banks thatadded free checking (6.77 percent).

Finally, many of the banks in the exempt sample that added freechecking are in direct competition with banks in the regulated samplethat dropped free checking, especially in nonmetropolitan markets (Ta-

ble 8). Banks in the regulated sample that dropped free checking mayhave motivated exempt competitors in nonmetropolitan areas to add

free checking.

Banks in the regulated sample

The competitive characteristics of regulated banks are relevant tothe pricing strategies at exempt banks because the banks in the exemptsample that added free checking accounts were relatively larger thanother exempt banks. Larger exempt banks may view smaller regulated

banks as primary competitors and thus devised pricing strategies that

targeted these banks. Table 9 examines this possibility by presentingcharacteristics of regulated banks that added or dropped free checking

accounts in 2012.Market characteristics. Banks in the regulated sample that dropped

free checking serve markets have a relatively high net migration (0.47

percent), and a relatively low share of population with at least a highschool education compared with the single regulated bank in the samplethat added free checking.

Financial characteristics.Regulated banks that dropped free check-ing have relatively low ratios of total loans to assets suggesting less needto attract deposits to fund loans.

Competitive characteristics. The banks in the regulated sample thatdropped free checking in their markets, have a relatively high shareaveraging 76.5 percent.

Overall, a limited demand for loans and an inability to set checkingaccount prices that effectively attract new customers may have influ-enced the decision of some regulated banks to drop free checking.


22/36


23/36


Summary of factors affecting checking account pricing

Market, financial, and competitive characteristics motivated anumber of exempt banks to add or drop free checking after regulation

of interchange fees on debit cards became effective. Banks in the exemptsample that added free checking tended to be in metropolitan markets

with large, affluent populations. These banks appear to have had strong

demand for loans and may have added free checking to attract funds foradditional lending. They operated in competitive markets where banksin the regulated sample controlled a modest share of the market and

were likely to face at least one bank from the regulated sample that

dropped free checking.Banks in the exempt sample that dropped free checking tended to

be in nonmetropolitan markets, had a relatively large market share andlimited competition. Banks in the regulated sample that dropped freechecking were in markets with some favorable characteristics but also

had limited demand for loans.

CONCLUSION

Interchange fee regulation has led to significant changes in the ex-tent to which free checking accounts are available to consumers and, inmany cases, to changes in the requirements under which conditional

free checking accounts are offered. Several key factors appear to havedriven banks decisions. Regulation of interchange fees for debit cardpayments eliminated roughly $8 billion of revenue at regulated com-

mercial banks. Such a large change led many regulated banks to dropfree checking. Some exempt institutions may have seen the regulation

of interchange fees as an opportunity to drop free checking and earnadded revenue from deposit services. However, more exempt banks,particularly larger exempt banksthose with strong loan demand anda need for additional fundingdecided to add free checking.

For an average consumer, free checking became more availableafter interchange fee regulation.22The footprint of banks offering freeaccounts rose from 19.4 percent of all checking account balances in

2011 to 21.6 percent in 2012. Elimination of free checking accounts

at larger, regulated banks was more than offset by an increase in freechecking accounts at smaller, exempt banks. While generally more


24/36


available, a consumer who wants free checking may have to switch to asmaller bank.

Changes to another major category of checking account products,conditional free checking, are less clear but are similar to changes in un-conditional free checking. Conditional free checking became somewhat

more expensive and more complex at banks in the regulated sample butless expensive and less complex at banks in the exempt sample.

Some important questions about pricing practices of commercial

banks and their checking account products are not addressed in thisarticle and will require additional research. Are the changes to checkingaccount products in 2012 unusually large or are they a normal part of

banking? Have changes persisted into 2013? Have they led to appre-ciable shifts in checking deposit shares among exempt and regulatedbanks? More broadly, what does a system of interchange fee regulation

that splits banks into regulated and exempt groups imply for competi-tion in the banking market? What pricing scheme for checking accountservices creates the most efficient payments system? Answers to these

questions may give policymakers a better understanding of the repercus-sions of interchange fee regulation in the commercial banking industry.


25/36


APPENDIX 1DATA AND BANK CHARACTERISTICS

Data definitions and sources

The data studied in this article contain observations on commercialbanks that have non-zero checking account deposits. The data excludeforeign banking organizations, bankers banks, and other specialty

banks that do not engage in consumer debit card services.Sample observations are in two data sets. One data set contains

regulated debit card issuers. It is a nonrandom sample drawn from a list

of the 100 top debit card issuers based on the dollar value of debit cardtransactions (Nilson 2010a; 2010b).23Commercial banks selected weresubject to interchange fee caps and were in operation in both 2011 and

2012, leaving 41 observations. The 41 sample banks came from 163total regulated commercial banks with non-zero checking account bal-ances (Table 1).

A second data set contains exempt commercial banks. The data setstarted with a set of 6,226 commercial banks that filed call reports at

year-end 2009 and with assets of less than $10 billion. A random sam-ple of these banks initially contained 323 observations. Observations

were lost primarily because data on checking account fees and require-ments were collected from bank websites, and some smaller banks do

not have websites or do not provide account details on their websites.24As a result, the final sample included 240 exempt banks.

Federal Reserve Board lists determined regulated and exempt status

for both data sets.

As shown above, smaller banks in nonmetropolitan areas tendedto drop free checking accounts. As a result, a lack of data may produce

results that to some extent may overstate any reduction in consumerscost of checking account services inferred from the sample of exemptbanks.25The bias would be small if the availability of free checking ismeasured by the share of checking account deposits in banks that of-

fer free checking because the banks that are lost from the data set arerelatively small.

Interest-bearing checking accounts were excluded, but changes inthese accounts are likely to be similar to noninterest checking accounts.


26/36


On average, interest-bearing checking accounts have higher monthlyfees and minimum balances to open and to avoid monthly fees (Federal

Reserve Board; Hannan), but interest earnings help offset the cost ofthese requirements. Finally, data on checking account fees from 1997 to2002 show that low-balance fees and minimum balances tend to havea stable relationship across noninterest and interest-bearing checking

accounts.26It was expected, therefore, that interchange fee regulationwould have a similar effect on debit card services for both noninterestand interest-bearing checking accounts.

Collection of data on the terms and conditions of the banks check-ing account products occurred in March and April 2011, before thefinal interchange fee regulation was determined and at least five months

before the regulation became effective. Data collection again occurredfrom April to June 2012, six months or more after the regulation wentinto effect.

Most banks have more than one checking account product, eachwith its own features and combination of requirements. As a result,data from some banks included more than one type of checking ac-

count. Free accounts, if available, were always coded. Other account

offerings at a bank were coded if they were open to a broad set of con-sumers. Excluded accounts had narrow eligibility requirements, such asthose restricted to the elderly, students, or military personnel.

Market and competitive characteristics for an exempt bank operat-ing in more than one market were weighted by the share of checkingaccount deposits the bank had in each market.

Data on bank financial and competitive characteristics are from callreports and from the FDIC Summary of Deposits. Data from the call

reports are for year-end 2010 and year-end 2011. Summary of depositsdata are from June 2011 and June 2012. Market characteristics comefrom the Census Bureau and the Bureau of Economic Analysis.

Characteristics of population and sample banks

The populations of all regulated and all exempt banks.All regulatedbanks are much larger and depend to a lesser extent on checking ac-counts as a source of funds compared with all exempt banks. Check-

ing account deposits average $4,002 million for all regulated banksand $47 million for all exempt banks (Table 1). The ratio of checking


27/36


account deposits to assets averages 9.23 percent at all regulated banksand 22.2 percent at all exempt banks.

Compared with all regulated banks, all exempt banks are moreprofitable and are less likely to be in metropolitan areas. Average returnsearned on assets are higher at all regulated banks (0.83 percent) than

at all exempt banks (0.28 percent). All regulated banks are much morelikely to be located in metropolitan areas (93.3 percent) than all exemptbanks (50.8 percent).

The population and sample of regulated banks.As discussed above,banks in the regulated sample have a higher average total assets and

lower return on assets than all regulated banks. Other, relatively mi-nor statistical differences include a lower ratio of checking accounts-to-assets (8.35 percent) and a higher rate of metropolitan location (97.6percent) for banks in the regulated sample compared to all regulated

banks (9.23 percent and 93.3 percent) (Table 1).The population and sample of exempt banks. Other than average as-

sets, which, as noted above, are modestly larger at banks in the exempt

sample, for other statistical characteristics, banks in the exempt sampleand all exempt banks and are similar (Table 1). Both groups of banks,for example, have similar average return on assets (0.36 percent versus

0.28 percent). In addition, distributions of regional location and thedeposit size for the exempt sample of banks is representative of the geo-graphic and size distributions for all exempt banks (Charts A1 and A2).


28/36


Source: Call Reports.

Chart A2

DEPOSIT SIZE DISTRIBUTION OF EXEMPT BANKS, 2010

Chart A1

REGIONAL DISTRIBUTION OF EXEMPT BANKS, 2010

5

10

15

20

25

30

35

Southeast Plains Southwest Far West

All exempt banks Sample exempt banks

NewEngland

MiddleEast

GreatLakes

RockyMountains

Percent

Notes: Regions are defined according to the following classification of states by the Bureau of Economic Analysis:New England: Conn., Mass., Maine, N.H., R.I., and Vt.; Middle East: District of Columbia, Del., Md., N.J.,N.Y., and Pa.; Southeast: Ala., Ark., Fla., Ga., Ky., La., Miss., N.C., S.C., Tenn., Va., and W.V.; Great Lakes: Ill.,Ind., Mich., Ohio, and Wis.; Plains: Iowa, Kan., Minn., Mo., Neb., N.D., and S.D.; Rocky Mountain: Colo.,Idaho, Mont., Utah, and Wyo.; Southwest: Ariz., N.M., Okla., and Texas; Far West: Alaska, Calif., Hawaii, Nev.,Ore., and Wash.

Sources: Call Reports, authors calculations.

10

20

30

40

50

$25 $50 $75 $100 $125 $150 $175 $200 $225 $250 $275 $300

All exempt banks Sample exempt banks

Percent

Over $300

Millions


29/36


APPENDIX 2

ESTIMATE OF CHECKING ACCOUNT BALANCES INBANKS THAT OFFER FREE CHECKING

The estimate of checking account balances in banks that offer free

checking extrapolates the statistics for the regulated and exempt sam-ples to all banks. The estimate should be accurate for exempt banks be-cause the sample is randomly selected from the all exempt banks. The

estimate may be less accurate for regulated banks because the banksin the regulated sample are not selected randomly. However, the mag-

nitude of the error may not be large because the banks in the regu-lated sample hold 84 percent of checking accounts held at all regulated

banks. Moreover, the regulated banks not in the sample are likely tobehave like regulated banks in the sample because they are both subjectto interchange fee regulation.

The estimate starts with the samples of banks. Among banks in theregulated sample, those that offered free checking in 2011 had $116 bil-lion in checking account balances, or a 21.2 percent share of the sample

total of $548 billion (Table A1, Panel A). In 2012, the account balancesat regulated institutions that offer free checking declined to $74 billionor 10.0 percent of $730 billion in checking account balances.

The final estimate applies the shares for the samples to all banks.All regulated banks in 2011 held $652 billion in checking account bal-ances. Assuming that 21.2 percent of those balances were in banks with

free checking, then all regulated banks offering free checking held $138billion in checking account deposits (Table A1, Panel B). A similar cal-

culation for 2012 provides an estimate of almost $96 billion.The same procedure provides an estimate of account balances inall exempt banks with free checking of $46 billion in 2011 and $182billion in 2012.

Adjustment for interest payments on business checking accounts

To adjust for the 2011 surge in deposits at regulated banks andkeep the ratio of consumer to total deposits closer to historical aver-ages, assume that the growth of deposits at regulated banks over 2011

is equal to that of exempt banks. Exempt bank checking accounts grew


30/36


Table A1

VALUE OF CHECKING ACCOUNTS AT BANKS THAT

OFFER FREE CHECKING, 2011-12

Notes: Offers of free checking accounts are as of spring 2011 and spring 2012. Dollar values are total checkingaccount balances for groups of banks. Aggregate values of checking accounts are as of year-end 2010 and year-end2011. The bank accounts in this sample have no monthly fees or monthly balance requirement. They may have aminimum opening balance requirement and will also be subject to fees such as for ATM withdrawals or cases of non-sufficient funds. Banks in this table are grouped by whether their debit card interchange fees are regulated or exemptfrom regulation. The shares in the tables are the percent of the total observations whose debit card interchange feesare either regulated or exempt from regulation.Sources: Call Reports, FDIC Summary of Deposits, authors calculations.

A. Banks in the Regulated and Exempt Samples

Regulated Exempt

2010 2011 2010 2011

All banks (billions) $548 $739 $15.4 $17.6

Banks that offer free checkingaccounts (billions)

$116 $74 $2.4 $9.8

Share of checking account deposits 21.2% 10.0% 15.6% 55.7%

B. Estimate for All Banks

Regulated Exempt

All banks (billions) 2011 2012 2011 2012

$652 $958 $294 $327

Banks that offer free checkingaccounts (billions)

.212 x $652=$138.0

.1 x $958=$95.6

.156 x $294=$46

.557 x $327=$182

C. Estimate for All Banks Adjusted for Interest Payments on Business Checking Accounts

Regulated Exempt

2010 2011 2010 2011

All banks (billions) $6521.112*$652

=$725$294 $327

Banks that offer free checking accounts (billions)

.212 x $652=$138

0.1*$725=$73

.156 x $294=$46

.557 x $327=$182


31/36


from $294 in 2010 to $327 in 2011, or 11.2 percent. If regulated bankchecking account balances grew at the same rate, then they would have

$725 (=1.112*$652) billion in checking account balances in 2011(Table A1, Panel C). Using the 10 percent of regulated bank balancesin banks that offer free checking results in $73 (=0.1*$725) billion inchecking account balances in regulated banks offering free checking.

For 2011, these results imply that 24.2 (=($73+$182)/($725.2+$327)*100) percent of all bank checking account balances

were in banks offering free checking. This represents an increase over

the 19.4 percent share for 2010 and thus is consistent with results re-ported above.


32/36


ENDNOTES

1

The 48-cent interchange fee is based on a $40 payment (Hayashi 2012).Calculations for the interchange fee in 2000, based on interchange rates and the

market shares of the four largest debit card networks, result in an average fee of

36 cents, again for a $40 payment. Data on interchange fees and the volume of

debit payments are from theAmerican Banker(various issues) and theEFT Data

Book(various issues). In 2000, Visa and MasterCard charged lower interchange

fees for signature debit payments at grocery stores. Assuming that half of Visa and

MasterCards signature debit payments were at grocery stores, the interchange fee

on a $40 debit payment was 36 cents. The rate would be higher (lower) if the

share of grocery payments is lower (higher) with a potential range of 30 cents to

42 cents.2For more on this issue, see Prager and others 2009. Other provisions gave

merchants the ability to choose the network that would process the transaction

and allowed merchants to provide discount for the use of cash, check, debit cards,

or credits cards (Hayashi 2012).3A coalition of merchants subsequently filed suit against the Federal Reserve

Board, arguing that it did not properly follow the specification in the law in set-

ting the cap and that the cap should have been set yet lower. On July 31, 2013, a

U.S. District Court ruled in favor of the merchants (Sokou). The Federal Reserve

has appealed the decision (Eavis).4Wangs estimate is an annualized drop in interchange revenues from the

third to the fourth quarter of 2011 for 102 regulated institutions. For compari-

son, at year-end 2010 the top 100 commercial banks had $202 billion in nonin-

terest income, of which $28 billion was for service charges on deposit accounts

(FDIC).5In the aftermath of the regulation, the financial press reported evidence with

two points of view. One story reported that Some 93 percent of community

banks said they would be required to charge their customers for services that now

are free (Digital Transactions News). About the same time, another story had the

headline Free Checking Has a Future, Mainly at Small Banks (Garver). Read-

ers need to look behind the headlines of these reports to understand whether the

story refers to regulated or exempt banks. Expectations for smaller banks were

possibly influenced by concern over implementation of a single interchange fee.

Networks quickly established that they would be able to implement a two-tier

interchange system.6Use of the terms commercial banks or banks throughout this article

refer to depository institutions with commercial bank licenses (or charters) and

excludes credit unions and savings and loan institutions.7The cost of delivering debit card services is also a financial characteristic im-

portant to banks. Some banks may concentrate on making deposit services more


33/36


efficient rather than re-pricing deposit services. A recent survey of debit card issu-

ers found that regulated issuers were more concerned about cost reduction than

were exempt issuers (Pulse). Thirty percent of regulated issuers surveyed reduced

their costs by ending debit card rewards programs.8Regulation Q, which controlled interest rates on deposits, went into effect

in 1933. Congress repealed the prohibition of interest rates on consumer accounts

in the early 1980s.9According to Call Report data, checking deposits at commercial banks in-

creased $344 billion, or 35 percent, in 2011. Interestingly, interest paid on check-

ing deposits declined from $1.34 billion in 2010 to $1.11 billion in 2011, reflect-

ing a downward trend in interest rates since 2009.10Because larger corporations tend to use the services of larger banks, the

surge of checking account balances may have been primarily in banks subject tointerchange fee regulation. In fact, checking accounts for all commercial banks

increased by $344 billion in 2011 and most of the increase$307 billionoc-

curred at regulated banks.11A third major category of checking accounts is the fee-only account. From

29 percent to 41 percent of banks offered fee-only accounts from 1997 to 2002

(Board of Governors; Hannan). Although fee-only accounts are now less com-

mon, interchange fee regulation may have caused a resurgence of these accounts.

From 2011 to 2012, availability of fee-only accounts increased from 6 percent to

14 percent of banks in the regulated sample and from 15 percent to 20 percent ofbanks in the exempt sample.

12These banks also exclude foreign banking organizations, bankers banks,

and other specialty banks that do not engage in debit card services.13The list ranks debit card issuers by the value of purchase transactions. Fifty-

nine banks in the list are either exempt or are not commercial banks and are not

in the final data set.14In addition, banks in the regulated sample held 84 percent of the checking

account deposits at all regulated banks.15The estimate of the checking account balances at all banks that offer free

checking shown in Table 3 is calculated by extrapolating the sample results to the

population of banks in the United States (details are in Appendix 2).16Another natural response of regulated banks to the interchange cap was to

reduce rewards programs on debit transactions. In a survey of debit card issuers,

Pulse found that 30 percent of regulated issuers had ended rewards programs for

debit card transactions. By contrast, among exempt banks in the sample, 10 per-

cent of respondents planned to drop, while 20 percent planned to launch, debit

card rewards programs.17Banks face barriers to attracting local customers from other banks due to

switching costs (Hannan and Adams). Bank customers face the opportunity costof their time in searching for a new bank and in making new arrangements for

payroll deposits or automatic bill payments. Out of pocket costs include new


34/36


35/36


REFERENCES

Association for Financial Professionals. 2010. AFP Electronic Payments: Reportof Survey Results, November.

Digital Transactions News. 2011. Small Banks Envision a Slew of New andHigher Fees in Durbins Wake, www.digitaltransactions.net/news/story/2924,February 14.

Eavis, Peter. 2013. Fed Appeals Rejection of Rule on Debit Card Fees, NewYork Times, dealbook.nytimes.com/2013/08/21/fed-appeals-rejection-of-rule-on-debit-card-fees/, August 21.

Federal Reserve Board. 2003. Annual Report to the Congress on Retail Fees andServices of Depository Institutions, Federal Reserve System, www.federalre-serve.gov/boarddocs/ rptcongress/2003fees.pdf.

FDIC. 2013. Statistics on Depository Institutions, accessed July 24, 2013, www2.fdic.gov/sdi/.Garver, Rob. 2011. Free Checking Has A Future, Mainly At Small Banks,

American Banker, p. 4, March 14.Hannan, Timothy H. 2001. Retail Fees of Depository Institutions, 1997-2001,

Federal Reserve Bulletin,pp. 407-413, September.Hannan, Timothy H., and Robert M. Adams. 2011. Consumer Switching Costs

and Firm Pricing: Evidence from Bank Pricing of Deposit Accounts, TheJournal of Industrial Economics, LIX (2), pp. 296-320, June.

Hayashi, Fumiko, Richard J. Sullivan, and Stuart E. Weiner. 2003.A Guide to theATM and Debit Card Industry,Federal Reserve Bank of Kansas City.

_____. 2013. The New Debit Card Regulations: Initial Effects on Merchants,Consumers, and Payment System Efficiency, Federal Reserve Bank of Kan-sas City, Economic Review, First Quarter, pp. 79-115.

Nilson Report. 2010a. Top 50 U.S. Debit Card Issuers, Issue 947, April._____. 2010b. Top 51 to 100 U.S. Debit Card Issuers, Issue 949, May.Prager, Robin A., Mark D. Manuszak, Elizabeth K. Kiser, and Ron Borzekowski.

2009. Interchange Fees and Payment Card Networks: Economics, IndustryDevelopments, and Policy Issues, Federal Reserve Board, FEDS WorkingPaper 2009-23.

Pulse. 2012. Executive Summary, Debit Issuer Study.

Sokou, Katerina. 2013. Court Sides With Retailers, Goes Against Fed Rule onDebit Card Fees, Washington Post, articles.washingtonpost.com/2013-07-31/business/40916047_1_debit-card-fees-merchants-payments-coalition-federal-reserve, July 31.

Sullivan, Richard. 2012. The Federal Reserves Reduced Role in Retail Payments:Implications for Efficiency and Risk, Federal Reserve Bank of Kansas City,Economic Review,97 (3), Third Quarter, pp. 79-106.

Sullivan, Richard, and Wang, Zhu. 2013. Internet Banking: An Exploration inTechnology Diffusion and Impact, Federal Reserve Bank of Richmond,Working Paper 13-10, August.

U.S. Department of Justice. 2000. Bank Merger Competitive Review. Septem-

ber http://www.justice.gov/atr/ public/guidelines/6472.pdf.Wang, Zhu. 2012. Debit Card Interchange Fee Regulation: Some Assessments

and Considerations, Federal Reserve Bank of Richmond, Economic Quar-terly, 98 (3), pp. 159-183.

Page numbering will change upon this articles inclusion in the coming issue of the Economic Review.


36/36

Date post:	04-Jun-2018
Category:	Documents
Upload:	shamyshabeer
View:	223 times
Download:	0 times

SuThe Impact of Debit Card Regulation on Checking Account Feesllivan

Documents