The Merchants Payments Coalition is crying foul about Bank of America Corp.’s announcement this week that it took a $10.4 billion third-quarter goodwill charge to counter impending reductions in debit-interchange income.
The Washington, D.C.-based coalition, which represents most of the nation’s largest merchants, contends BofA’s claims of steep future losses from a new rate policy the Federal Reserve is planning to propose “dramatically overstates reality.” It contends the issuer crafted the claims to “send a message” to lawmakers.
“We fear that BofA is trying to influence the policy-making process here, saying the sky is falling and prematurely announcing huge losses associated with new debit-interchange rules that are being developed,” Doug Kantor, a coalition attorney, tells PaymentsSource. “BofA may want regulators to hear them say ‘We're losing all this money’ (on debit interchange), which provides a backdrop for them to suggest they are going to nail their customers with a lot more fees and charges if they take away too much debit-interchange revenue.”
When announcing its earnings for the quarter ended Sept. 30, BofA on Oct. 19 said its Global Card Services unit incurred a net loss of $9.87 billion partly caused by the goodwill-impairment charge, which would cover losses the bank expects to absorb when new debit-interchange rates take effect in July (see story).
So far, no other major issuer has taken a similar charge against future reductions in revenue connected to the pending changes in debit-interchange rates.
A BofA spokesperson tells PaymentsSource the bank conducted its own analysis and has "a pretty good roadmap" of the potential effect of debit-interchange reform on its future revenues. The impairment charge was necessary because accounting rules require that the bank conduct a quarterly impairment analysis on its combined credit and debit card operation. The spokesperson noted that BofA is the nation's largest debit card issuer and may be more severely affected by a decline in debit interchange fees than some other banks.
Although no one can say what the new rate limits might be, “it is universally acknowledged that they will be lower” than present debit-interchange rates, Duncan B. Douglass, a partner with the Atlanta-based law firm of Alton + Bird LLP who specializes in transaction law, tells PaymentsSource. “Whether debit interchange will be reduced by 20% or 80% is unknown,” he says.
It is “reasonable” for BofA to include anticipated impacts of regulatory change in its quarterly results, but it is unclear how BofA arrived at the $10 billion figure, Douglass says. “No one should wildly speculate about what the new debit-interchange rules will be, but BofA must feel they have enough information to put some additional color on this.”
Legislation signed into law earlier this year requires the Fed to issue final rules to ensure “reasonable and proportional” debit card interchange rates by April 21. Assuming the Fed will allow approximately two months each for public comment and for the agency to digest responses before the rules go into effect in July, the Fed likely will issue its proposed rules in late December, Douglass says.
BofA CEO Brian Moynihan told analysts during a conference announcing third-quarter earnings that, while the new debit-interchange rules do not go into effect until next year and the rules “aren’t clear,” it will likely be “a multiquarter and even a multiyear” project to retool products and fees for profitability.
The bank over the next 12 months will roll out a “new account structure” that will introduce new fees and services to checking accounts, Moynihan said.
Examples include BofA’s eBanking account. Introduced in August, the initiative requires holders of the accounts to bank exclusively online; paper statements or access to tellers will cost them $8.95 monthly.
Moynihan also said he is pleased with BofA’s new “emergency cash” option introduced last summer that generates a $35 charge when customers exceed their balances when withdrawing cash from ATMs. About half of customers faced with the paying fee accept it, he said.