Regulatory Change and The New Consumer Card and Banking Relationship

Chapter 1: Executive Summary

The CARD Act: Challenges and Strategies

Card Act - Stage I - August 2009

Notice and mailing requirements

Card Act - Stage II - February 2010

Eliminating harmful practices and increasing transparency

Card Act - Stage III - August 2010

Disproportionate penalties and rate increase reevaluation

Fee must be reasonable and proportional

Federal Reserve moves to amend regulations and provide clarification

Ramifications of the CARD Act

Cost to banks in the billions

“Reasonable and proportional” application still looms

Strategies to make up the difference

Penalty and Transaction Fee Trends

Consumer Overdraft Protection: Challenges & Strategies

The Key Provision: Regulation E

What is it?

Amendments and their effect

Overdraft Revenue & Usage Analysis

FDIC Study of Bank Overdraft Programs

Earnings estimates

Revenue estimates

Revenue drivers

90% of NSF fees accrued from customers with 5+ NSF transactions per year

FDIC proposal foretells more regulation, reduced fee income

Supervisory action threatened

Steering high-frequency overdraft users a no-no—and we’re watching

Opt-out of non-ATM and non-POS debit transactions?

High-to-low processing history? Prepare to hide

Wells Fargo litigation sets precedent for additional litigation

For how much could the industry be on the hook?

$203 million in restitution to Californians for three years of high-to-low posting

Strategies going forward

Keep trying to get them to opt in!

Or engage in “revenue expansion”

Overdraft revenue fallout & evolving strategy applications

Q3 2010 tale of the tape

Dodd-Frank Wall Street Reform: Challenges and Strategies 13

The Durbin Amendment & Debit Interchange

Actual cost incurred

Merchants allowed to set minimum amounts and incent use of cash

Woe to debit interchange!

We believe commercial banking combined interchange exceeds $70 billion

Q3 2010 combined card interchange among top 10 banks: $17 billion

Q3 2010 debit interchange tops $2 billion at Bank of America alone

Going forward

Sue the government!

Segue into contactless

Or buy stock in PIN debit processors

Bureau of Consumer Financial Protection

What is it and what is it supposed to do?

What is the scope of its authority?

Broad rule-making authority

Broad enforcement authority

Macroeconomic Influences & Consumer Wealth Analysis

Consumer confidence helps put brakes on spending

Unemployment picture stabilizes

Unemployment and GPD forecast

Consumer Wealth on the Mend

Household wealth repair

Case-Shiller and FOMC housing pessimism

Householder equity comes off its bottom

Stock equity trends

Consumer & Industry Credit and Loan Performance Trends 20

Saving more + paying down debt = a healthy consumer

Chipping away at the debt burden

Consumers unburden themselves of debt

Debt service ratios peak at onset of 2008 and decline thereafter

Consumer & Household Loan Trends

Credit Card Trends

Revolving credit declines

Credit card loan performance trends

Credit card interest income a saving grace

Card lending policies final loosen a bit

Unused credit line culling coming to a close?

Credit card tightening starting to loosen

Card Loans Outstanding Growth Mirrored By Purchase Volume Gains

Visa leads MasterCard in credit and debit purchase volume growth

Big Six Issuers each grow purchase volume

Deposit Trends

Bank of America leads total domestic deposits

Banking Institution Regulatory Strategy Profiles

American Express

Response to Credit CARD Act

Regulatory Impact

CARD Act impact

Durbin Amendment impact

U.S. growth trends

JPMorgan Chase & Co.

Chase’s take on regulatory reform

Card Services

Response to CARD Act

Adjust intro rates, promo rates, and contract rates

Retail Banking

Reg E impact

More than 26 million checking accounts—1,300 per banker

Bank of America

Company Overview

Global Card Services segment

CARD Act Response

$1 billion CARD Act impact

Deposits segment

Reg E strategy and impact

$1 billion after-tax!

Overdraft strategy: high-to-low ringing in Bank of America’s ears?

eBanking intended to drive down costs

Looking ahead: Not an overdraft fee; a convenience fee

$10 billion Durbin Amendment impact

Capital One Financial

Card Act and Rewards

Discover Financial Services

Company overview

Network and Card Initiatives

Student loans diversify company away from plastic

And toward cross-selling opportunity

Wells Fargo

Cross-selling champion

Response to Credit CARD Act

CARD Act impact

Consumer Banking

Reg E impact: $800 million and counting

High-to-low reaches a low point

U.S. Bancorp

Consumer Banking

Payment Services

Reg E, CARD Act and Durbin Impact

Revised overdraft policy

Citigroup

Cards and CARD Act

Simplicity in checking

Consumer Financial Services Usage & Attitudes

Negative attitudes provide opportunity

Credit card engagement falls; high-frequency use increases share

Balance payment trends relatively unchanged

Focus on young adults

Table 1-1: Echo Boom Generation, % of Population, 2006-2015

Protections for young people not reflected in issuer terms and conditions

Campus credit card promotional agreements monitored

Three-quarters of campus spend from Bank America

Alumni organizations & foundations generate disproportionate account share

Table 1-2: Educational Institutions and Organizations, Card Agreements, Selected Metrics, 2009

Students age 18-20 comprise 56% of all students

Table 1-3: Full-Time and Part-Time Students, By Age, 2010

Focus on the affluent

Primary banking relationships provide the key to success

Wells Fargo commands mass affluent share

Chapter 2: The CARD Act: Challenges and Strategies

Card Act - Stage I - August 2009

Notice and mailing requirements

Card Act - Stage II - February 2010

Eliminating harmful practices and increasing transparency

Card Act - Stage III - August 2010

Disproportionate penalties and rate increase reevaluation

Fee must be reasonable and proportional

Federal Reserve moves to amend regulations and provide clarification

Consumer protections enhanced

Promotions waiving interest & offering reduced rate afforded same protections

Fee cap applies to fees charged before and after the account is opened

Individual’s independent income must be considered

Ramifications of the CARD Act

Cost to banks in the billions

“Reasonable and proportional” application still looms

Rewards on the block?

Rewards-related penalties crop up

Strategies to make up the difference

Penalty and Transaction Fee Trends

Penalty interest rates increase

Undisclosed penalty APRs on almost 50% of cards

Late fees remain ubiquitous while overlimit fees decline

Penalty interest rates increase and are still widely used

Cure period disclosures

Transaction surcharge fees remain common

Cash advance fee and balance transfer rates rise

Annual fee amounts spike

Chapter 3: Consumer Overdraft Protection: Challenges & Strategies

The Key Provision: Regulation E

What is it?

Amendments and their effect

Getting more specific

No fees for ATM and one-time debit card overdrafts without opt-in

No exceptions

Written documentation

Does not apply to check, ACH, and recurring debit card transactions

Overdraft Revenue & Usage Analysis

FDIC Study of Bank Overdraft Programs

4 in 5 automated programs allow ATM and POS overdrafts

Customers informed afterward

High-to-low ordering practices conducted by majority of large banks

Earnings estimates

Revenue estimates

Revenue drivers

90% of NSF fees accrued from customers with 5+ NSF transactions per year

H1 2010 Overdraft Revenue and Usage Trends

Table 3-1: U.S. Banking Overdraft Revenue, 2005-2011 ($ billions)

Opt-in trends

Revenue drivers: high-frequency overdraft users

Study asserts 60% and 80% opt-in rate

We’re more pessimistic

Packaged Facts Foresees More Trouble Ahead

FDIC proposal foretells more regulation, reduced fee income

Limits on number of overdrafts, daily fee accrual and high-to-low processing

Supervisory action threatened

Steering high-frequency overdraft users a no-no—and we’re watching

Opt-out of non-ATM and non-POS debit transactions?

Wanted: Responsible transaction account and small-dollar loan program innovation!

Outcry, outcry!

Scrutinize? Take supervisory action? Industry says this goes too far

Set expectations, but don’t regulate them

Consumers and consumer groups want it to go further

Consumer advocacy groups circle the wagons

Set concrete limits—and enforce them!

High-to-low processing history? Prepare to hide

Wells Fargo litigation sets precedent for additional litigation

For how much could the industry be on the hook?

$203 million in restitution to Californians for three years of high-to-low posting

11% of overdraft revenue

The details: High-to-low posting under legal fire

Commingling and deployment of the shadow line

Legal conclusion: gouging & profiteering drove overdraft program changes

Strategies going forward

Keep trying to get them to opt in!

Or engage in “revenue expansion”

Table 3-2: Fiserv revenue realization estimates, overdraft mitigation strategies

New deposit products

Short-term liquidity solutions

Cross-sell, loyalty and retention products

Predictive Analytics

Overdraft revenue fallout & evolving strategy applications

Q3 2010 mitigation: tale of the tape

Provident & National Penn succeed with high-frequency users

PNC, Regions and Fifth Third losses range from $5 million to $50 million

Bank of America new account opt-in rate at 40%

SunTrust eliminates fees on transactions valued at less than $5

First Financial Bancorp reports no customer attrition

“Grace period” trades fee income for market share & customer satisfaction

Customization + cross-selling = revenue

Compass Bancshares customizes with “free” checking and “premium” add-ins

KeyCorp gives layered “Key Coverage”—for $10 a month

Proactive communication + courtesy = fees and higher customer satisfaction

United Heritage Credit Union: “Courtesy Pay” to “help” and provide “options”

A friendly reminder from mobile banking . .

. . . To incentivize use of overdraft protection

Chapter 4: Dodd-Frank Wall Street Reform: Challenges and Strategies

The Durbin Amendment & Debit Interchange

Bottom line

Fees

Reasonable and proportional

Actual cost incurred

Who’s exempt?

Merchants allowed to set minimum amounts and incent use of cash

Woe to debit interchange!

$20 billion in the balance?

We believe commercial banking combined interchange exceeds $70 billion

Q3 2010 combined card interchange among top 10 banks: $17 billion

Q3 2010 debit interchange tops $2 billion at Bank of America alone

Table 4-1: Top 10 Banks, By Bank Card and Credit Card Interchange Fee Income, 2010

Which helps explain Bank of America’s $10 billion goodwill write-off

Going forward

Sue the government!

Segue into contactless

Or buy stock in PIN debit processors

Bureau of Consumer Financial Protection

What is it and what is it supposed to do?

To what or who does the BCFP report?

What is its structure?

What is the scope of its authority?

Consolidation and enhancement of consumer protection authority

Who is exempt?

Broad rule-making authority

Broad enforcement authority

Chapter 5: Macroeconomic Influences & Consumer Wealth Analysis

Consumer confidence helps put brakes on spending

Current perceptions of business conditions, job prospects darken

Expectations Index dips as job prospect optimism dims

Unemployment picture stabilizes

Figure 5-1: Unemployment Rate and Consumer Confidence, 2007-2010

Unemployment and GPD forecast

Adjusted projections

Table 5-1: Unemployment and GDP Forecast, 2010-2012

Consumer Wealth on the Mend

Household wealth repair

Table 5-2: Household Net Worth, 2005-2010 (in trillions of $)

Case-Shiller and FOMC housing pessimism

Bottom line: recent growth, but weakening trends

Householder equity comes off its bottom

Table 5-3: Household owners' equity in real estate, 2004-2010

Stock equity trends

Bottom line analysis

Figure 5-2: Wealth Effect: Wilshire 5000 and Case Shiller Index, 2007-2010

Chapter 6: Consumer & Industry Credit and Loan Performance Trends

Saving more + paying down debt = a healthy consumer

Chipping away at the debt burden

Consumers unburden themselves of debt

Bottom line

Figure 6-1: Consumer Debt Burden, 2000-2010

Debt service ratios peak at onset of 2008 and decline thereafter

Analysis

Figure 6-2: Savings Rate & Debt Service Ratio, 2007-2010

Consumer & Household Loan Trends

Table 6-1: Loans Outstanding, by Loan Type, FDIC-Insured Institutions, 2007-2010 (in billions of dollars)

Mortgage loan performance trends

Figure 6-3: Loan Performance, Closed-End First Lien 1-4 Family Residential Mortgages, 2007-2010

Credit Card Trends

Revolving credit trends in focus

Figure 6-4: Consumer Revolving and Non-Revolving Debt Trends, 2004-2010

Figure 6-5: Consumer Revolving and Non-Revolving Debt Trends, % Change, 2004-2010

Credit card loan performance trends

Figure 6-6: Loan Performance, Credit Cards, 2007-2010

Table 6-2: Credit Card Loans Outstanding & Unused Credit Card Lines, 2007-2010 (in billions of dollars)

Table 6-3: Top 15 FDIC-Insured Institutions, Credit Card Loan Receivables, Q3 2009 vs. Q2 2010 (in billions of dollars)

Figure 6-7: 30-Day Monthly Delinquency Rates, Top Six Card Issuers, % Change, 2009-2010

Credit card interest rates increase while banks’ borrowing costs decrease

Federal funds target rate at historical lows

Profit margins breathe easier

Figure 6-8: Credit Card Interest Rate & Federal Funds Rate Trends, 2004-2010

Credit card interest income a saving grace

Figure 6-9: Top 10 Banks, By Credit Card Interest Income, 2010

Card lending policies final loosen a bit

Unused credit line culling coming to a close?

Credit card tightening starting to loosen

Figure 6-10: Credit Card Loan Tightening, Top 100 Banks, Q1 2007 to Q4 2010

Card Loans Outstanding Growth Mirrored By Purchase Volume Gains

Visa leads MasterCard in credit and debit purchase volume growth

Figure 6-11: Quarterly Purchase Volume, Visa and MasterCard, Credit and Debit Cards, 2009-2010

Big Six Issuers each grow purchase volume

Figure 6-12: Quarterly Purchase Volume, Big Six Issuers, Credit Cards, 2009-2010

Deposit Trends

Table 6-4: Domestic Deposits, by Type of Deposit, 2007-2010 (in billions of dollars)

Bank of America leads total domestic deposits

Table 6-5: Top 15 Commercial Banks & Savings Institutions, Total Number of Offices and Domestic Deposits, 2007 vs. 2010

Chapter 7: Banking Institution Regulatory Strategy Profiles

American Express

Value Proposition

Table 7-1: 2008 Worldwide Cardholder Spend, American Express, Visa, & MasterCard

Company overview

Response to Credit CARD Act

American Express well-situated to take advantage of frugality trend

Regulatory Impact

CARD Act impact

Durbin Amendment impact

Sales and Card Growth

Worldwide assessment

Table 7-2: American Express Card Billed Business, Discount Revenue, Net Card Fees, 2007-Q2 2010 (in billions of $)

Table 7-3: American Express Discount Rate, Card Spend, & Fee per Card, 2005-Q2 2010

U.S. growth trends

Table 7-4: American Express U.S. Region Billed Business & Cards in Force, 2005-2009

JPMorgan Chase & Co.

Chase’s take on regulatory reform

Card Services: Summary Overview

Response to CARD Act

Adjust intro rates, promo rates, and contract rates

Table 7-5: JPMorgan Chase Card Services, Interest Rate Offerings Change, 2008-2009

JPMorgan Chase Card Services by the Numbers

Down, down, down: cards, transactions and volume

Retail Banking: Summary Overview

Reg E impact

More than 26 million checking accounts—1,300 per banker

Table 7-6: JPMorgan Chase Retail Banking, Retail Footprint Metrics, 2005-2010

Table 7-7: JPMorgan Chase Retail Banking, Household Product Usage, By Type, 2005-2010

Bank of America

Company Overview

Global Card Services segment

Card Act Response

$1 billion CARD Act impact

Card Act and Rewards

Deposits segment

Reg E strategy and impact

$1 billion after-tax!

Overdraft strategy: high-to-low ringing in Bank of America’s ears?

eBanking intended to drive down costs

ATM emergency cash tied to payroll card - and a $35 fee

And emergency cash tied to credit card

And emergency cash tied to an ATM!

Looking ahead: Not an overdraft fee; a convenience fee

$10 billion Durbin Amendment impact

Bank of America: Key Metrics

Table 7-8: Bank of America, Selected Credit Card and Consumer Banking Metrics, 2008-09

Table 7-9: Bank of America Demographics: A Tale of the Tape, 2010

Capital One Financial

2008-2010 trends

Card Act Response

Card Act and Rewards

Capital One: Key Metrics

Table 7-10: Capital One, Key Credit Card Metrics, 2007-2009 (in millions, except ratios and where otherwise noted)

Discover Financial Services

Company overview

Network and Card Initiatives

Response to Credit CARD Act

Student loans diversify company away from plastic

And toward cross-selling opportunity

Response to Recession

Table 7-11: Discover, Key Credit Card Metrics, 2007-2009 (in millions, except ratios and where otherwise noted)

Wells Fargo

Company overview

Cross-selling champion

Response to Credit CARD Act

CARD Act impact

Consumer Banking

Reg E impact: $800 million and counting

High-to-low reaches a low point

Wells Fargo: Key Metrics

Table 7-12: Wells Fargo, Key Credit Card Metrics, 2007-2009 (in millions, except ratios and where otherwise noted)

Table 7-13: Wells Fargo, Core Deposits, by Type, Q1 2009-Q2 2010 .147

Table 7-14: Wells Fargo, Retail Banking Metrics, 2010

U.S. Bancorp

Consumer Banking

Payment Services

Reg E, CARD Act and Durbin Impact

Revised overdraft policy

Citigroup

Cards and CARD Act

Simplicity in checking

Chapter 8: Consumer Financial Services Usage & Attitudes Trends

Negative personal finance and banking attitudes provide opportunity

Table 8-1: Attitudes about Personal Finance, 2005-2010

Table 8-2: Consumer Banking Products Usage, by Type, 2005-2010

Table 8-3: Consumer Loans, by Type, 2005-2010

Table 8-4: Consumer Investments, by Type, 2005-2010

Table 8-5: Credit Card Engagement, 2005-2010

Portion of paid balances

Table 8-6: Credit Card Monthly Payments, Portion Paid, All Cards, 2005-2010

Focus on young adults

Table 8-7: Echo Boom Generation, % of Population, 2006-2015

Protections for young people not reflected in issuer terms and conditions

Campus credit card promotional agreements monitored

Three-quarters of campus spend from Bank America

Alumni organizations & foundations generate disproportionate account share

Table 8-8: Educational Institutions and Organizations, Card Agreements, Selected Metrics, 2009

Students age 18-20 comprise 56% of all students

Table 8-9: Full-Time and Part-Time Students, By Age, 2010

Focus on the affluent

Table 8-10: Household Income, by Income Bracket, 2008

Primary banking relationships provide the key to success

Wells Fargo commands mass affluent share

Table 8-11: Affluent Consumers, Primary Banking Relationship, by HH Income Segments

Chapter Appendix: Trended Credit Card Balances, Portions Paid

Table 8-12: Credit Card Monthly Payments, Portion Paid, American Express, 2005-2010

Table 8-13: Credit Card Monthly Payments, Portion Paid, Discover, 2005-2010

Table 8-14: Credit Card Monthly Payments, Portion Paid, MasterCard, 2005-2010

Table 8-15: Credit Card Monthly Payments, Portion Paid, Visa, 2005-2010

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