Wells Fargo has started a pilot program in several parts of the country to understand how customers will respond to a monthly fee on their debit cards. [1] The bank, which holds the distinction of being the second-largest bank in the U.S. in terms of deposits held, will charge a $3 monthly charge to all customers who use their debit or ATM card for making purchases at merchant establishments.
JPMorgan Chase, Regions Financial Corp. and SunTrust Banks Inc. have already started charging fees on their cards to varying degrees. Bank of America has also hinted at joining this list soon.
We currently have a $32 price estimate for Wells Fargo, which is around 40% above the market price. We believe the current low prices reflect the market’s negative sentiments due to uncertainty of the impact of the U.S. debt rating downgrade and the growing European debt crisis.
[trefischart ticker=WFC width=350 driver=3295]
Monthly Fees Aimed at Filling the Void from New Regs
The Federal Reserve capped the fees on debit card swipes, also called the debit card interchange fee, at 21 cents in June this year. [2] The cap comes in effect starting 1st October and will significantly hit the banks' revenues in credit cards as debit card transactions were earlier charged using a formula which averaged about 1.14% of the transaction value.
Most banks have already responded to this change by stripping debit cards of reward points and other frills – in an attempt to ensure lower expenses given the significantly lowered earning potential from debit cards.
Wells Fargo intends to explore the viability of monthly fees to make good on this loss in revenue. TCF Financial Corp., which is contemplating a similar monthly fee, is also considering additional charges on customers who swipe their cards more than a particular number of times over a period. TCF opines that all banks will come up with some or the other charges on their debit card offering with time.
The Impact on Wells Fargo
Wells Fargo is the second largest issuer of debit cards in the U.S. and estimates a loss of about $813 million in debit card interchange fees per year. [3]
The bank has issued about 40 million debit cards in the country. As the monthly charges will not apply to cards used only at ATMs, this program targets most of the cardholders. If the pilot program is successful and the new fee structure is rolled-out across the country, we believe this will reach at least 80% of the debit card holders (nearly 32 million) who will end up paying this monthly fee of $3.
This represents revenues of almost $1.1 billion each year as monthly fees. This clearly more than makes up for the estimated revenue shortfall – assuming cardholders do not shift to other debit card issuers in substantially large numbers.
See our full analysis of Wells Fargo.
Notes:
- US Banks Begin Charging Monthly Debit-Card Fees, The Wall Street Journal, Aug 17 2011 [↩]
- Visa, MasterCard Climb as Fed Increases Caps on Debit-Card Fees, Bloomberg, Jun 30 2011 [↩]
- Wells Fargo to Begin Charging Debit Card Fees, MyBankTracker.com, Aug 16 2011 [↩]
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