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Banks most reliant on interchange fees

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Banks most reliant on interchange fees

Despiteearning a dismal rate on loans, the banking industry has grown profits in the years since the financial crisis, findingother ways to increase income. One of those ways is through interchange fees, orthe fees paid by merchants to banks when bank customers use a debit or credit cardto make a purchase. Interchange income hasgrown after new regulation imposed limits on debit card fees in late 2011.

The Dodd-FrankAct of 2010 included the "Durbin amendment," the more common name forRegulation II, whichmandated that banking regulators limit the amount of debit card interchange feesthat banks could charge merchants. The rule went into effect Oct. 1, 2011, and onlyapplies to banks with assets above $10 billion. The regulation capped the maximumpermissible interchange fee that an issuer may receive for an electronic debit transactionat the sum of 21 cents per transaction, plus 5 basis points multiplied by the valueof the transaction, plus up to an additional 1 cent per transaction if the issuerimplements fraud-prevention policies and procedures. The Fed said that for the averagedebit card transaction of $38, a debit card issuer above $10 billion in assets couldcharge no more than 24 cents. The rule does not apply to credit card or prepaiddebit card transactions.

Whilethe banking industry's interchange income tooka hit in 2012 after the rule went into effect, the aggregate interchangeincome has risen back to pre-Durbin levels, according to regulatory data. Banksreport "bank card and credit card interchange fees" in Form Y-9Cs andcall reports. Data is somewhat limited because banks only have to disclose the lineitem if their interchange fees equate to more than 3% of "other noninterestincome" and total more than $25,000; 54.5% of banks reported the figure for2015, up from 43.4% who reported it for 2011.

To allow comparisons across years since 2010 in the above graph,the analysis excludes institutions from the aggregates that filed a thrift financialreport for either 2010 or 2011. The thrift financial report did not require filersto break out interchange fees, and so including these companies causes an artificialincrease in the aggregate figure in 2012 when thrifts had to begin filing call reports.

Excluding these former thrifts, aggregate interchange fees fromdebit and credit card transactions fell to $27.97 billion in 2012 from $30.58 billionin 2011. But since then, interchange fees rose to $32.25 billion in 2015, an increaseof 15.3% from 2012 levels, while overall operating revenue for banks, excludingformer thrifts, grew by only 1.7% over the same time period.

The potential loss of interchange income is a major reason banksapproach growth above $10 billion in assets withcaution. Banks that earn significant income from debit card interchangefees will almost certainly see a decline after they become subject to the Durbinamendment. Credit cards and prepaid debit cards are not subject to the interchangecap, so it's not surprising to see AmericanExpress Co. and GreenDot Corp. at the top of the ranking of holding companies most relianton interchange income as a percentage of operating revenue. Twelve of the top 20banks most reliant on interchange income have less than $10 billion in assets.

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At the largest four U.S. banks, which hold nearly40% of the country's deposits, growth in interchange income has been mixed.JPMorgan Chase & Co.saw its 2015 interchange income fall to $4.89 billion in 2015 from $5.31 billionin 2014, or to 9.9% of noninterest income from 10.3% of noninterest income. , on the otherhand, reported interchange income rose to $4.34 billion in 2015 from $4.30 billionin 2014, or to 10.4% of noninterest income from 9.9% of noninterest income.

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Regulatory data is not yet available for the first quarter of2016, but some of the early reporters have seen positive trends in card purchasevolume. Wells Fargo & Co.CFO John Shrewsberry said during the company's earnings conference call April 14 that debit card purchase volumewas $72.4 billion, up 9% from the year-ago quarter, and credit card purchase volumewas up 13% from a year ago to $17.5 billion. Bank of America CFO Paul Donofrio alsosaid April 14 during the company's earningscall that credit card spending was up 8% in the first quarter comparedto the year-ago quarter, adjusted for the divestiture of a $1.6 billion credit card portfolio to .

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The charts above were compiled using the Regulated Depositories section of the Data Wizard in SNL Office.

Bank card and credit card interchange fees can also be accessed for individual companies by looking under "Financials" on a company's briefing book page. Click on Schedule HI for Form Y-9C filers or on Schedule RI for call report filers.