In an attempt to prevent card incomes from dipping significantly after the Federal Reserve capped fees on debit card swipes, Bank of America (NYSE:BAC) is pushing its existing debit card customers to switch to credit cards.  The bank is luring its brokerage clients into signing up for credit cards and giving up their deferred-debit cards by allowing them to retain their existing reward points, and also giving them additional points for making the switch. The scheme is targeted towards brokerage clients holding a Visa (NYSE:V) signature debit card linked to their brokerage accounts. These debit card will not earn any rewards after November 15th which may tempt these clients to make the switch. Competitors of the banking giant, including JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Regions Financial Corp. (NYSE:RF) and SunTrust Banks Inc. (NYSE:STI), have already implemented steps to counter the effect of the fee cap which comes into effect on October 1st.
We currently have a price estimate of $11 for Bank of America’s stock, which we are reviewing in light of the string of lawsuits against the bank that are compounded by the weak global economic conditions.
Debit Card Revenues are Set to Fall Significantly…
The Federal Reserve capped the fees on debit card swipes, also called the debit card interchange fee, at 21 cents in June this year.  The cap comes in effect October 1st and will significantly dent the card revenue generated by banks, as debit card transactions were earlier charged using a formula which averaged about 1.14% of the transaction value.
Most banks have stripped their debit card offering of reward points and other such frills while some like Wells Fargo are also considering a monthly fee on the use of debit cards.
… but Credit Cards Still Remain Largely Unregulated
On the other hand, credit card transaction fees are not capped, and earn the bank nearly 2% of the purchase price per swipe. Clearly, the banks gain significantly by getting users to move to credit cards, and that is what the rewards points scheme introduced by Bank of America aims at.
Our analysis of Bank of America shows that the card business contributes nearly a sixth of the bank’s estimated $11 value. It therefore comes as no surprise that the bank will try anything it can to get customers to move from debit to credit cards in order to minimize the loss of revenue.Notes:
- BofA Steers Some Clients From Debit to Credit, Bloomberg, Sept 20 2011 [↩]
- Visa, MasterCard Climb as Fed Increases Caps on Debit-Card Fees, Bloomberg, Jun 30 2011 [↩]