CHICAGO, June 23, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: JPMorgan Chase & Co. (NYSE: JPM), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Visa Inc. (NYSE: V) and Mastercard Incorporated (NYSE: MA).
Here are highlights from Wednesday's Analyst Blog:
Will Credit Unions Replace Banks?
On the one hand, banks are figuring out ways to recover some money that they are bound to lose due to the imminent cut in interchange fees, as dictated in the Wall Street reform legislation last year.
On the other hand, credit unions are gaining more popularity among consumers as alternatives to banks for their higher rates and lower fees. This recent development in the banking sector was reported in The Street on Tuesday.
The trend is expected to gradually transmit the profit origin of banks to the credit unions. The obvious question that now arises is –– will these credit unions be able to replace banks?
Like the Federal Deposit Insurance Corporation (FDIC) guarantees bank deposits, The National Credit Union Administration (NCUA) supervises the nation's credit unions and guarantees their funds. So safety and soundness is not likely to be a concern for consumers who choose credit unions over banks.
Problem with Banks
According to a provision in the 2010 Dodd-Frank act, the Federal Reserve needs to cap the interchange fees for U.S. banks including JPMorgan Chase & Co. (NYSE: JPM), Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC). The rule was supposed to be enacted effective July, but faced lobbying resistance. The Federal Reserve board will again meet on June 29, this time to issue its final rule.
Pursuant the adoption of the cap, it would be significantly difficult for big banks to earn revenues from debit card interchange fees. So the banks are hatching plans to enforce a cap on the amount of transaction that consumers can through their debit cards.
This way, the banks would be able to recover some profits that they would have to sacrifice to the Federal Reserve. Needless to say, consumers who genuinely depend on a debit cards would end up being victims of the banking device.
What are Interchange Fees?
For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (NYSE: V) and Mastercard Incorporated (NYSE: MA). The charged amount is called interchange fees.
Magnitude of the Cap
In December, the Federal Reserve proposed to cap interchange fees for big banks at 12 cents per transaction. This represents a decrease of about 75% from the previous average. According to estimations by the banking industry, this would drain about $12 billion in revenues annually from the sector.
Role of Credit Unions
Coming to credit unions, these are owned by their members who elect volunteer directors for governance. These credit unions operate as non-profit organizations with a lower expense base than banks. As a result, if they generate more than their required capital, the surplus is distributed among members.
There are two types of credit unions, namely retail and corporate. Retail credit unions lend money and take deposits from individuals. However, corporate credit unions do not deal directly with consumers. These institutions provide financing, check clearing and other services to retail credit unions.
How Attractive are Credit Unions?
According to RateWatch's industry data for last week, the average rate for a 12-month certificate of deposit with a $10,000 balance for the nation's credit unions was 0.75%, significantly higher than the average rate of 0.45% for banks.
Also, for interest-paying checking accounts with no minimum balance requirement, the banks paid at an average rate of 0.08%, while the credit unions paid twice the average rate.
Additionally, credit unions are at par with banks with respect to deposit insurance. When a bank fails, the FDIC reimburses customer deposits of up to $250,000 per account. The NCUA has also raised the basic share insurance limit of credit unions to $250,000. So credit unions are in a competitive position to attract deposits from consumers.
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