Draft terms agreed to by the European Parliament and the European Council in December that cap interchange fees on some European debit and credit card transactions will likely have a manageable financial impact on American Express (AmEx, 'A+') and Discover Financial Services (Discover, 'BBB+'), Fitch Ratings says.
We expect that the effect will also be manageable but more felt at banks with operations concentrated in the EU that issue payment cards on the Visa and MasterCard networks. However, the interchange fee caps have been widely anticipated, and we believe that issuers have had time to prepare for the impact on revenue.
Fitch believes increased regulation could have some unintended consequences. For example, card members could face higher fees and/or reduced benefits as banks re-assess these programs and seek to maintain appropriate profitability targets. Fitch believes these could potentially take the form of annual membership fees, account maintenance or other fees and/or more limited rewards. At the same time, it remains unclear if merchants will be willing to pass through the savings to consumers.
According to the European Commission, the new rules would introduce maximum fees for consumer debit and credit cards and establish transparency rules for all transactions, among other points. The agreement is in line with expectations that interchange fees paid by merchants will become capped at 0.2% for debit card transactions and 0.3% for credit card purchases. The primary targets of the proposals are four-party payment networks (e.g. Visa and MasterCard), although three-party payments systems that rely on bank issuers are also likely included in the new rules. Three-party systems that rely on bank issuers would include AmEx's Global Network Services (GNS) business and Discover's Diner's Club, although neither is a material earnings contributor to their respective franchises. The core proprietary card businesses of Amex and Discover (which do not rely on bank issuers), are not included in the recent agreement, consistent with the prior proposal.
The agreement remains subject to final endorsement by EU member states and by the Economic and Monetary Affairs Committee, befoins subject to final endorsement by EU member states and by the Economic and Monetary Affairs Committee, before being put to a vote by the full Parliament, which is expected in early 2015, according to the European Commission. The caps are expected to take effect six months after the legislation enters into force.