The Truth Hurts (the Bottom Line)

The Star Tribune ran a story yesterday about a regional bank in Minneapolis (TCF) which is handing out pre-addressed postcards to their customers to send in to Congress opposing the the reduction of Interchange Fees for retailers. They insist that consumer pricing will go up if the bill passes.



This is a bad move. They are flirting with disaster.  The disaster they are flirting with is two-fold.  One, if I'm a business owner who is unhappy with Interchange, I go to another bank.  Interchange represented 22% of TCF Banks revenue last quarter.  TCF cannot exactly be considered a non-biased entity.  Fees would increase, but it would be the banks who would increase their fees to make up for the fees lost to a lower interchange. 

As a consumer, it's the following quote from TCF spokesman Jason Korstange which would have enticed me to go to another banking institution with my business. 

 "We're taking all the risk associated with whether or not these people have the money on these cards," said TCF spokesman Jason Korstange.

Say what Jason?  Obviously you are speaking about TCF debit card, as credit cards don't "have money on them."   So what exactly is the risk that TCF is taking?  Let's analyze:  There are two types of debit transactions.  PIN andSignature.  Certainly there is no risk if it is a PIN Debit transaction, because if there is no money, the transaction is declined.  No money, no transaction, no risk. 



Therefore It must be a "Signature Debit" transaction of which he speaks.   So let's investigate "all the risk." If it is a Signature Debit transaction and there is no money in the account, it "used to be" declined.  However, banks such as TCF realized that they could derive $38 Billion Dollars in overdraft charges by intentionally approving a non-sufficiently funded debit transaction and charge a $35 overdraft fee.  As the NY Times so aptly put it:

"Not many people would knowingly pay more than $35 for a cup of coffee. But far too many people are getting saddled — with no warning — with outsized bills for minor purchases, under a euphemistically labeled "overdraft protection program" that most major banks have adopted over the last 10 years.  Before that, most banks would simply have rejected debit transactions, without a fee, when the card holder’s account was empty. Now, they approve the purchase and tack on a hefty penalty for each transaction."

Of the two types of debit transactions, (PIN vs. Signature) one is 15 times more likely to result in a fraudulent transaction.  It's no coincidence that it happens to be the same one banks attach rewards in order to attract more users/customers.  Now why on earth would they want to attract more people to use a card that is 15 times more likely to result in a fraudulent transaction.  Two reasons: Higher Interchange Fees and Overdraft Charges. Interchange represented 22% of TCF Banks revenues last quarter, it would be interesting to find out how much "overdraft charges" earned TCF. 



So where's the risk associated with whether "these people" (sounds rather condescending) have money on these cards?  You can fool some of the people some of the time...but you're not even close with this one.  The only risk I see is that you will lose customers by insulting their intelligence.



Here's a snippet from Chris Serres of the Star Tribune, in Minneapolis

Sep. 5--If you walk into a TCF Financial Corp. branch these days, there's a good chance you'll be encouraged to sign up for a cause dear to the bank's bottom line.



In an unusual move, the Wayzata-based regional bank late last month began handing out thousands of postcards to its customers. The cards urge members of Congress to oppose legislation that could reduce the billions of dollars in so-called interchange fees that retailers pay to banks.



Along with the postcards -- pre-addressed to members of Congress -- TCF bank tellers are handing out a signed letter from the bank's CEO Bill Cooper, warning that consumers will end up footing the bill if retailers are able to avoid the fees. "If this legislation passes," Cooper warns, "your costs will go up."



Historically, the topic of interchange fees hasn't aroused much passion among consumers. Many people don't even realize that every time they swipe their plastic, stores pay an average of 1.8 percent of the purchase amount to the bank that issued the credit or debit card.



But with nearly $50 billion in fees at stake, companies on both sides of the debate are getting creative in an effort to influence Congress. 7-Eleven, home of the Slurpee, has been circulating placards of its own in support of the legislation and has a goal of collecting more than 1 million signatures. Though TCF has no such goals, the bank reportedly gathered 10,000 signed postcards in its branches within a week.



Three bills on the fees

There are currently three pieces of legislation related to interchange fees winding their way through Congress. None of them would eliminate the fees entirely but, taken together, they could severely limit the amount banks collect. A bill introduced earlier this summer would enable retailers to join together to negotiate with Visa and MasterCard, the credit card networks that set the interchange fees.



The income from interchange fees has grown dramatically in recent years as consumers use their plastic to pay for a much wider variety of items. Retailers also claim the card networks have raised their fees on certain cards. Last year, retailers paid $48 billion in interchange fees, up from $16.6 billion in 2001, according to the National Retail Federation.



The banks argue that such fees are necessary, because they incur significant risk when offering credit and debit cards. The banks also provide a service by ensuring the money flows to the retailer immediately with each card transaction. "We're taking all the risk associated with whether or not these people have the money on these cards," said TCF spokesman Jason Korstange.



A spokeswoman for the Electronic Payments Coalition, a trade group that has been leading the campaign against the legislation, said she is unaware of any financial institution other than TCF gathering signatures on the issue.



One reason is that TCF relies more on fee income than many of its rivals. TCF's interchange revenue from customer card transactions represented 22 percent of its revenue in the most recent quarter. That translates into about $25 million for the quarter.



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