Neobanks see opportunity as banks may restrict “free” services

It could be argued that the natural consequences of introducing fee caps and interchange restrictions on debit transactions – and the uncertainty of the regulatory climate – are now manifesting themselves in the expected withdrawal of banks from traditionally “free” services and products.

Amid this pullback, neobanks—digital-only newcomers looking to outdo their bigger brethren—have a chance to grab some market share. But only if they develop business models that are less dependent on interchange/transaction volumes in an environment where consumers are fickle about how much and where they spend.

As The Wall Street Journal reported on Friday (July 5), JPMorgan noted that potential new rules cutting overdraft and card fees will make it more expensive for banks to offer checking accounts and other services — and as a result, consumers will be saddled with the new fees.

Broad changes, broad impact

“The changes will be broad, radical and significant,” said Marianne Lake, CEO of consumer and community banking at JPMorgan, according to the Journal. “Those who can least afford it will be hit hardest, and access to credit will be harder.”

As PYMNTS has documented, the Consumer Financial Protection Bureau has sought to reduce typical late fees charged by card issuers from an average of $32 to — in most cases — $8. Elsewhere, the Supreme Court ruled last week that a lawsuit by a group of merchants challenging debit card interchange fees can proceed.

Of course, JPMorgan is not alone in this. Banks of all stripes may try to compensate for the loss of fee revenue in other ways. And there is already some historical evidence that consumers lose out on the innovation and rewards they value when new regulations are introduced.

As Karen Webster’s March column shows, the Credit Card Competition Act is a prime example of what happens when mandates — in this case, dual-passing — cause issuers to reduce card rewards.

As noted in the study, “The Impact of U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis,” economist David Evans wrote that bank customers “lost more to the bank than they gained to the merchant,” by as much as $25 billion in discounted dollars, as a result of the interchange fee caps introduced by the 2010 Durbin Amendment. Banking industry trade groups estimated that after Regulation II went into effect, the percentage of banks offering fee-free checking accounts fell from 60% to less than 20%.

When it comes to the opportunities facing digital-only players, PYMNTS Intelligence data reveals that younger generations are poised to move away from the largest banks and social media players.

PYMNTS Intelligence research found that 42% of Gen Zers who use credit unions have changed their banking offerings in the past 12 months, as did 44% of Gen Zers who use traditional financial institutions.

Opportunities and challenges for digital gamers

Sixty percent of these account switchers kept their previous accounts open but no longer use them as their primary bank account—it’s no longer a priority and/or a portfolio priority. Forty percent closed their accounts entirely. It’s not a stretch to think that this change in loyalty could be accelerated by new account fees.

But that’s a big “if.”

Digital players may face increasing pressure on their own models and changing interchange dynamics. In the spring, we reported that many of these companies still tied their fates to payment networks and, by extension, payment volumes.

Chime states on its website that banking services are provided by banking partners such as The Bancorp Bank and Stride Bank. These financial institutions also issue credit and debit cards that Chime members use (such as the Chime Visa Debit Card). Chime has noted that it makes money through a steady stream of debit transactions among its members.

“The majority of Chime’s revenue comes from Visa cards,” the company says on its website.

Separately, Monzo’s profit results, detailed in its latest annual report, showed the company was profitable on an operational basis. The majority of its income comes from transaction income, which includes interchange fees, and this item accounted for 75% of the company’s fee and commission income in the last reporting year.