Visa and MasterCard shares slide as Fed calls for debit card fees cut

Visa and MasterCard shares slide as Fed calls for debit card fees cut

Shares in Visa and MasterCard tumbled yesterday after the Federal Reserve Board proposed a 12 cent per transaction cap on debit card interchange fees.

The firms saw their share prices plunge by more than 10% off the back of the draft rules, which comes after the Fed was told to step in as part of the Dodd-Frank financial-overhaul legislation. The news also hits big issuing banks such as Bank of America, JP Morgan Chase and Wells Fargo.

Around 38 billion debit card payments were made in the US in 2009 with interchange fees totalling over $16 billion.

The Board is calling for comment on two possible standards; one based on each issuer's costs, with a safe harbour (initially set at seven cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap of 12 cents.

Either option would see the maximum allowable interchange fee received tumble to more than 70% lower than the 2009 average once the new rule takes effect on 21 July 2011.

The proposed rule would also prohibit all issuers and networks from restricting the number of networks over which debit card transactions may be processed.

Senator Dick Durbin, responsible for the interchange amendment to the Dodd-Frank bill, welcomed the Fed proposal, saying: "Today's draft rule from the Federal Reserve makes it clear that big bank interchange rates: overcharge businesses and consumers in America by at least three times the average cost of processing; that the reforms called for by my amendment will save retailers, charities and consumers up to $10 billion each year; and the changes we had to enforce by law in the US are being voluntarily implemented by mega-banks and card giants in Europe and other countries."

The Merchants Payments Coalition, representing 2.7 million US businesses, argues that the "proposed rules are a step forward in bringing fairness and transparency to the debit fee system".

In contrast, Visa expressed concern about the consequences, saying: "Given the importance and complexity of this undertaking, we believe the Federal Reserve must be given additional time to fulfil its responsibilities and to analyse the unintended consequences of the proposals on the industry and consumers."

MasterCard general counsel Noah Hanft was more openly critical, arguing: "Experience demonstrates that consumers, not banks or payments networks are the biggest losers as a result of this regulation. This type of price control is misguided and anti-competitive, and in the end is harmful to consumers."

The draft rules are now open to comment until February.

Comments: (3)

Jan-Olof Brunila
Jan-Olof Brunila - Swedbank - Stockholm 17 December, 2010, 12:36Be the first to give this comment the thumbs up 0 likes

Wall Street is not always right - Visa and MasterCard possible interchange fee cuts on debit cards in the USA is a loss for the card issuer banks and not Visa and MasterCard. The misconception that the card schemes suffer from lower interchange fees is widespread. Such losses are only at worst longer term and indirect for schemes but direct on issuer banks. The investor relations people at the card scheme companies should consider telling the market that their revenues come from banks paying for issuer and acquirer licensing and data processing and not from interchange fees.

A Finextra member
A Finextra member 17 December, 2010, 16:48Be the first to give this comment the thumbs up 0 likes

The changes to debit interchange will affect the income of all banks, independent banks owned by local investors and credit unions owned by depositors. Banks are not responsible for the current financial crisis, most did not receive TARP money, and consumers will not benefit from further deterioration of their local banks while increasing profits of large retailer. Merchants are not force to accept this product, let them revert back to accepting cash or paper checks which costs 10 times what a debit card costs to process. This is not a consumer versus big bank issue, it is a bank versus large retailers issue and if the retailer wins, the consumer will lose. Bank fees will cost more to cover the cost of the product, but the retailer will have a huge savings in processing a transactions.
What other industry would tolerate price fixing for products and services provided to retailers? Would a toy manufacture be subjected to providing income and expense of its product and allow the government to determine how much the toy should cost. Hopefully common sense will prevail.

A Finextra member
A Finextra member 18 December, 2010, 10:09Be the first to give this comment the thumbs up 0 likes

Whether or not the price is determined by government the cost of transactions will come down through new competition.

As consumers ditch cards their respective banks will disintermediate the card issuers and receive income from transactions directly. I'd be budgeting on around 5-10c.

Perhaps the analogy of a retailer is inappropriate. If all toymakers were in a cartel then it might apply.

I faintly remember my jottings on the potential share price movement of these companies. Uncharacteristically accurate.