Retail banking in the United States is governed by financial regulations designed to improve customer outcomes, enhance safety and soundness of financial institutions, preserve financial stability, and improve competitiveness across the industry.
In the first months of 2024 alone, three major regulatory proposals were issued that impact credit and debit card businesses and checking accounts. The Federal Reserve Board’s proposed revisions to Regulation II’s interchange fee cap, the CFPB’s 2023 credit card late fees proposed rule, and the multi-agency proposals on capital known as the “Basel III Endgame.”
Regulatory proposals from various agencies at times may impose requirements that impact banks in overlapping ways. This is especially true when simultaneous regulations try to tackle common objectives, sometimes producing complex interactions. In some cases the impacts can be additive, while in others one proposal can offset certain costs or benefits of another. In yet other cases, the combination of two or more proposals can produce unexpected outcomes.
These unintended consequences are easier to identify when the full set of relevant proposals are assessed holistically. However, there is no broadly accepted framework that considers the impact of multiple regulatory proposals. We aim to address this gap by offering a framework to guide the analysis of aggregated impacts from multiple proposals as most regulation is intended to benefit consumers, our framework focuses on those effects. We approach this topic from three angles: the direct impact of regulatory requirements, knock-on impact from in-scope banks’ adaptation to new requirements, and further impact from industry evolution.
How regulatory requirements directly impact customers
Regulatory proposals will often directly affect consumers’ financial lives by imposing requirements on certain financial products or services they use, such as establishing new requirements for customer onboarding or setting price caps for certain fees. Such requirements may directly affect the products or prices available to consumers, or the process of opening accounts and accessing them, including the information consumers must provide. These changes may also impact customer behavior. For example, lower prices on late fees might incentivize consumers to pay late more often because the deterrence factor is smaller.
Results from banks adaptation to new requirements
New regulations can significantly change the operational requirements, costs, risks, or potential sources of revenue for banks. As banks adapt their business models accordingly, these adjustments can also result in significant customer impacts. For example, a rule that restricts pricing from a product may lead some banks to rethink their pricing strategies to sustain the product’s overall profitability. This may result in higher prices that certain, or all, customers need to pay. Whereas, if a combination of multiple regulations restricts several of the most practical sources of revenue for a product, banks might reduce provision of the product, which can have an impact on product availability for consumers.
Effects from industry evolution in retail banking
While in-scope banks make individual strategic choices, some common themes can emerge such as an increase or decrease in products or services provided to customers by this group. These themes are expected to prompt reactions from other providers in retail banking, potentially creating new industry trends. For example, if many in-scope banks decide to stop providing a product because regulation rendered it uneconomical or too risky, out-of-scope firms may find a sizable expansion opportunity by doing so. This may result in changing the mix of providers in the market and affecting the choices and protections available to consumers. When the volume of products is moved to institutions that are less regulated, the net effect could be less overall regulation --including those rules intended to protect consumers.
Consumers experience the combined impact from all three of these angles. For example, they may experience differences in pricing, access to products, and the range and nature of product features at their disposal because of these dynamics. Different customer segments -- high-net-worth individuals, small businesses, and low-to-moderate income individuals -- may experience these shifts to various degrees.
While it is logical to assess customer impact by stepping through these three angles one after another as unique phases, in practice, they sometimes overlap. For example, in-scope banks will likely consider potential impacts on industry evolution before making their own decisions. For the sake of simplicity and clarity, we discuss these angles sequentially, but the framework is flexible and can be adapted to more complex analytical approaches.
Our full report, “The Impact Of Simultaneous Regulatory Proposals In Retail Banking,” applies our framework to the combination of the recent proposed regulations. We recognize there are other regulatory proposals currently under development, such as the recently proposed rulemaking related to overdraft fees, but we have decided to use these three proposals as examples to discuss the application of the framework rather than aiming for comprehensiveness or complexity. We do not attempt to quantify any of the impacts, but simply illustrate the way this framework can be used.
