Bank of America`s Debit Card Fees
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Transcript Bank of America`s Debit Card Fees
Bank of America’s Debit Card Fees:
Consumer Perception vs. Corporate Strategy
Overview
Introduction & Problem Statement
Background
– Review of Financial Crisis
– Impact of Dodd-Frank
– Bank of America
– Public Protests
Decision Point & Discussion
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B of A’s Decision
Action
Bank of America (BOA) decided to implement a $5 per
month fee for its debit card users
Environment
The external environment sector remained turbulent
2007 Housing Collapse & Foreclosure Epidemic
2008 Financial Crisis
Toxic Asset Relief Program (TARP)
Occupy Wall Street Protests
Reaction
The public reacted with boycotts, protests, and online
petitions (which went viral)
What should
BoA do?
Proceed as planned and face a public relations
nightmare or cancel the fee program, lose billions, and
be forced to answer to shareholders?
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History of Bank of America
Started in 1904 as Bank of Italy
before merging with Bank of
America in 1928, adopting name
Provides service across:
– 50 states
– 40 countries
– 5,700 retail branches
Maintains 57 million consumer
and business relationships
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Brian Moynihan, Bank of America CEO
• CEO since January 2010
• Earned J.D. from the University of
Notre Dame
• Joined B of A in 2004, through the
acquisition of Fleet Boston
• Career banker
Evolution of the Financial Industry
Multi-decade era of
deregulating the financial sector
Changing legislation lead to
rapid growth, but also increased
exposure
Banks became over-levered and
vulnerable to the financial crisis
of 2008
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Notable Policy
Decisions/Legislation
1980
Depository Institutions
Deregulation and Monetary
Control Act.
1982
Garn–St. Germain Depository
Institutions Act of 1982
1999
Gramm-Leach-Bliley Financial
Services Modernization Act
2000
No regulations on OTC
Derivatives
2000s
No regulations on Hedge Funds
2010
Dodd–Frank Wall Street Reform
and Consumer Protection Act
Consolidation of Financial Institutions
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Volatility of Financial Institutions
Symbol
1995 Price
2005 Price
% Change
Bank of America
$11.97
$46.99
285.77%
Citi
$58.33
$481.80
746.09%
JP Morgan
$12.97
$39.01
208.19%
Wells Fargo
$5.87
$31.00
434.80%
Symbol
2005 Price
2009 Price
% Change
Bank of America
$46.99
$14.33
(67.96%)
Citi
$481.80
$71.40
(85.32%)
JP Morgan
$39.01
$31.35
(18.36%)
Wells Fargo
$31.00
$30.00
(3.49%)
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Response from Legislators
In response to the 2008 financial
crisis, Congress passed new
legislation to “re-regulate” Wall
Street (Dodd-Frank)
Included in this legislation was an
amendment from Senator Dick
Durbin, IL
– Limited anti-competitive practices
from commercial banks
– Provided Federal Reserve the power
to regulate debit card interchange fees
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Senator Durbin
Transaction Fee Background
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Interchange Fee Market
The introduction of the Durbin Amendment:
– Reduced debit transaction fees banks could charge merchants by
50 percent ($0.44 $0.22)
Volume of Debit
Transactions per Year
Pre-Durbin
Fee per
Transaction
Debit Fee
Revenue
38.5 billion
$0.44
$16 billion
Post-Durbin 38.5 billion
$0.22
$8 billion
– Eliminated $8b worth of revenue for banking industry (50% of
total market)
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Financial Impact to B of A
In 2010, 53% of B of A’s revenue came from fee-based sources
– Fee-based revenue: $58.7B
– Interest-based revenue: $52.7B
Enactment of the Durbin Amendment significantly reduced a
reliable source of revenue; transaction fees
$1.9B in
fees
3.65%
Noninterest
income
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1.67% of
Total
Revenue
Shaken Consumer Confidence
B of A’s decision to implement its
new fee came during a time of
financial distress and uncertainty
–
–
–
–
–
3.9 million home foreclosures
Recession; Effects of Financial Crisis
Tax-payer funded bailouts
Perception of executive greed
Nationwide protests
These variables created
apprehension toward the financial
industry
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2011 Timeline of Events
9/17
9/27
10/1
10/3
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10/5
10/8
10/15
10/28
10/29
10/29
Recap
“Era of
Deregulation”
Banks seek
opportunities
to recover
lost revenues
Implementation
of Dodd-Frank
Act and Durbin
Amendment
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BoA proposal
of $5 debit
usage fee
Case Questions
What should
BoA do?
Proceed as planned and face a public relations
nightmare or cancel the fee program, lose billions,
and be forced to answer to shareholders?
What was the most significant issue for Bank of America in
this case?
What was the root cause of public outcry? (Timing,
Substance, Insensitivity)
Did Bank of America conduct enough market research prior
to proposing the new $5 debit card fee?
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