Visa Inc and MasterCard Inc may face permanent damage to the fastest-growing part of their business after the US Federal Reserve proposed rules that could cut debit-card transaction fees by 90 per cent.
“It is negative all around,” wrote Scott Valentin, an analyst at FBR Capital Markets, in a note to clients. “This significantly impacts the business model for the networks.”
Visa and MasterCard, the world’s biggest payment networks, plunged more than 10 per cent in New York trading yesterday after the Fed proposed capping so-called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 per cent of the purchase price, regardless of cost, and pass that money along to card-issuing banks.
The change, if approved by the Fed after a public comment period, would wipe out most of an estimated $15 billion in annual revenue for US lenders that issue Visa and MasterCard debit cards, including Bank of America, JPMorgan Chase & Co and Wells Fargo & Co.
“These credit-card giants and banks are imposing fees that are in no relation to the actual cost of processing, and the retailers and merchants have no way to bargain or even resist these increases,” US Senator Richard Durbin, the Illinois Democrat who pushed for the caps, said in an interview. “This new law brings the Federal Reserve into the picture and changes that dynamic.”
Visa fell $9.75, or 13 per cent, to $67.19 in New York Stock Exchange composite trading, the most in two years. MasterCard, ranked second among card networks and based in Purchase, New York, declined $25.73, or 10 per cent, to $223.49.
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More competition
The Fed hasn’t yet decided how to implement a rule that would require banks to let merchants choose from at least two independent debit networks for routing transactions, a change that could create more competition for MasterCard and San Francisco-based Visa.
MasterCard said the Fed proposal fails to consider “the full range of costs” that card-issuers incur to operate debit programs and that the rules would shift merchant costs to consumers.
“Experience demonstrates that consumers, not banks or payments networks, are the biggest losers as a result of this regulation,” Noah Hanft, general counsel for Purchase, New York-based MasterCard, said in a statement. “This type of price control is misguided and anticompetitive.”
Visa, which derives 20 per cent of its revenue from US debit, said implementing the rules would create “unintended consequences” for the industry and consumers.