5 New Banking Trends for 2011

It’s March, but it’s not too late to publish our predictions for 2011. First of all, banks usually go into hibernation for the winter months, and leave interest rates alone until springtime. Second, the 2011 game-changer is the Durbin Amendment, and when and how the Federal Reserve decides to regulate debit merchant exchange fees will have profound implications for the entire industry.

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The Fed is still reviewing its proposals, however, so the NerdWallet Ouija board keeps showing, “Try again later.” Still, we’ve put together a list of five banking industry trends that we think will accelerate or deepen in the remaining 10 months of the year.

1. The rich get richer and the poor get poorer

Rates on low interest cards have been falling for a while, and we’re seeing an uptick in balance transfer and other promotional offers. Banks are offering juicy rewards for those with good credit, in an effort to get the penalty-dodging-APR crowd spending money. For those who front the cash for annual fees, rewards credit cards are improving too – see, for example, the new deal out of Capital One for 100,000 bonus miles. This kind of deal hasn’t been seen in years.

Vitally, credit card merchant exchange fees are not regulated by the Durbin Amendment, and often bring in higher fees than debit cards. Rewards credit cards command the highest swipe fees of all, so look for banks to push customers to get rewards cards and then to use them often.

On the other hand, interest rates have spiked for those with bad credit. The Credit CARD Act of 2009 prohibited “risk-based pricing,” in which card issuers changed the interest rate of a card if the customer’s risk profile changed. They can also no longer charge overdraft fees unless customers opt-in, and even then can do so in a limited fashion.

Unable to hike interest rates and denied lucrative overdraft penalties, banks now charge a higher rate upfront. Some banks even charge a flat fee for poor credit histories, irrespective of consumer behavior and in addition to the annual fees that come standard with poor credit. No one expects interest rates to be as low as they were in the pre-recession days, but those with bad credit will be hit harder and longer.

2. More fees, less free

This is where financial reform comes in. The Dodd-Frank bill banned overdraft fees unless customers opt in, curtailed rate hikes in credit cards, and per the Durbin Amendment, authorized the Fed to limit debit interchange fees. In years past, “free” checking was paid for by “swipe fees” and by overdraft charges on small segments of the population.

Now, banks cannot earn as much money from the overdrawing crowd. The cost of free checking, which was never truly free to begin with, will be spread over a broader customer base. Rob Windsor, president of First Financial Services Credit Union, says, “Consumers are used to getting all these services for free, including free checking, debit, credit. But none of these things are free. We need revenue to pay for them.”

The revenue will come from charging for services that were previously free. Free checking is already on its way out: many banks now charge a monthly fee, or for services such as paper statements and teller assistance. Others are becoming creative with their fees: Bank of America demands a $59 annual fee for credit card customers with bad credit, while Citibank levies a fee for customers who put less than $2,400 on their cards a year.

Debit interchange fees, interest rate hikes and overdraft charges were extremely lucrative for banks. Now, they are forced to change their revenue models and spread fees over more of their customers.

3. Pruned debit rewards programs

Banks make money off different customers in different ways. Those with poor credit pay in the form of high annual fees and high interest, penalty and cash advance rates; debit cards previously yielded overdraft and swipe fees; and rewards credit cards offered juicy premiums on merchant fees and the occasional annual fee.

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As we mentioned before, only the last revenue stream is still in place. Therefore, while banks spice up their rewards credit cards to get the cardholders spending and swiping, rewards debit cards are nowhere near as lucrative.

A number of banks now charge annual or monthly fees for debit rewards programs, or have removed them altogether. PNC did away with free rewards checking, and Chase and Wells Fargo have axed their entire debit rewards program for new customers. Other banks are expected to follow. Rewards checking still exists; free checking still exists. Both in the same account, however, is a feature likely to become history.