Financial Regulatory Reform 2010: Why the Dodd-Frank Act is Only the Starting Point for Reshaping Consumer Protections and Interchange

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the keystone in the Obama administration'sregulatory era, affecting the balance of power among the banking and payments industries, retailing, consumers and regulators. Two consumer-focused elements — the creation of the Consumer Financial Protection Bureau (CFPB) and the Durbin Amendment covering interchange rules (Section 1075) — loom large in their potential to affect how consumers borrow, bank and buy. The sweepof the reforms and a lack of regulatory detail create both headaches and opportunities for banks, credit unions, card issuers and financial services vendors as they seek to comply with the rules, influence how future regulations will be defined and enforced, and cope with both the intended and unintended consequences of the reform.

Primary Questions

- How will the Dodd-Frank Act — and specifically the creation of the Consumer Financial Protection Bureau and the Durbin Amendment — change how consumers borrow, bank and buy financial products?

- What steps should banks, credit unions, card issuers and financial services vendors take to preserve revenue and thrive in this new regulatory environment?

- Where can FIs still play an influential role in defining regulations and shaping how they will be enforced?

- Where will the new consumer protection watchdog focus its attention first?

- How will the Durbin Amendment affect consumers' use of debit, credit, prepaid cards and other card-related products, and what are the possible consequences — intended or not — for interchange pricing and card usage?

- How can debit issuers use fraud-prevention investments to offset lost interchange revenues?

- How should the payments industry reposition its lobbying efforts to counter the political and regulatory gains of merchants?

Methodology

This report is based on a comprehensive qualitative review and analysis of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as analysis of data from a number of secondary industry data sources.

Javelin also incorporated data collected in its consumer and market surveys, including the following:

- A random-sample panel collected online of 5,211 household finance managers in March 2010. The overall margin of sampling error is ±1.36 percentage points at the 95% confidence level. The survey targeted consumers based on proportions of gender, age, ethnicity and income representative of those of the overall U.S. online population. Rounding in the underlying numbers in the figures included in this report accounts for the slight differences in totals.

- The majority of Javelin's consumer-related data is based on “online households” vs. “individual consumers.” In 2009, the U.S. population was estimated to be 306 million. That number includes 232 million adults, 118 million households and 86 million households that are online. On average, about 2.6 people reside in each household. Javelin also collects data using a base of all consumers for comparison purposes.

- A survey conducted during March and April of 2010 to compare and evaluate customer-facing security measures offered by the top 26 card issuers in the U.S. The survey used online content available on the card issuers' websites and mystery shopping via calls to customer service representatives at each issuer organization. An average of 6.2 calls was made to each issuer reviewed in the study.

- A random-sample panel of 3,294 consumers collected online in November 2009 with an overall margin of sampling error of ±1.71 percentage points at the 95% confidence level.

Overview
Primary Questions
Methodology
Executive Summary & Key Recommendations
Introduction
Key Components of the Dodd-Frank Act
The Consumer Financial Protection Bureau
Key Components of Title X
Industry Lobbyists Have a Window to Shape the Law's Practical Impact
Look for the CFPB to Focus Early on Scoring Headlines as a Watchdog
Redefine How Your Customers Monitor and Manage Their Money
View Disclosure as an Opportunity to Sell Products That Keep Trusting Customers Coming Back for More
The Durbin Amendment — Section 1075 of the Dodd-Frank Act
Key Components of Interchange and Card Payment Reform
Lower Debit Interchange Will Drive Heightened Issuer Focus on Rebuilding the Use of Credit Cards
Allowance for Fraud Prevention Gives Issuers a Break
Merchants Will Push for Further Control Over Payments Services
Multitier Interchange Rates Will Create a Confusing Product Environment and the Need for Additional
Rule-Making
Reloadable Prepaid Cards Get a Bye, But Regulations Are Coming
Lobby to Influence the Direction That Interchange and Other Durbin Amendment Reforms Will Take
Consumers and Small Businesses Are Not the Key Beneficiaries
Appendix
Related Research
Companies Mentioned

Table of Figures

Figure 1: Consumer Satisfaction with Current Banking Relationship (2004-2010)
Figure 2: Budgets of Five Federal Watchdog Agencies
Figure 3: Paid at Least One Overdraft Fee in the Past Year (Consumers vs. Newly Banked)
Figure 4: Payment Method Most Frequently Selected for In-Store Purchases (All Consumers vs. Those Who Have Decreased
the Use of Credit Cards)
Figure 5: Overall Scoring by Fraud Category, Total Possible Points vs. Average Issuer Score
Figure 6: Only MetaBank and H&R Block are Free From Interchange Regulation
Figure 7: Issuer Security Scorecard Performance of the Top 10 Debit Issuers
Figure 8: Top U.S. FI Issuers of Prepaid Cards Based on 2008 Purchase Volume
Figure 9: Consumer Expectations Regarding Merchant Price Changes as a Result of Interchange Reform
Figure 10: Only MetaBank and H&R Block Have Less Than $10 Billion in Assets.
Figure 11: All Top Signature and PIN-based Debit-Card Issuers are Subject to Interchange Regulation
Figure 12: Mostly Credit Unions Escape Interchange Regulation
Figure 13: Credit Unions are Less Directly Affected by Interchange Regulation Than Banks or Thrifts

- America First CU
- JPMorgan Chase
- Arvest Bank
- KeyBank
- Associated Bank
- M&I Bank
- Bancorp Bank
- M&T Bank
- BancorpSouth
- MetaBank
- Bank of America
- Navy FCU
- Bank of the West
- People's United
- BB&T
- PNC
- BBVA Compass
- RBC Bank
- BECU
- Regions Bank
- Capital One
- Sovereign Bank
- Citibank
- State Empl. CU N.C.
- Citizens Bank
- Suncoast Sch. FCU
- Comerica
- SunTrust
- Commerce Bank Mo.
- Synovus/CB&T
- Desert Schools FCU
- TCF Financial
- E*Trade Bank
- TD Bank
- Fifth Third
- The Golden 1 CU
- First Horizon
- Town North
- GE Money
- U.S. Bank
- H&R Block
- UMB Bank
- Harris N.A.
- Union Bank
- HSBC
- USAA
- Huntington Bank
- Wells Fargo
- ICBA Bancard
- Zions Bancorp.

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