Thursday, December 16, 2010

Federal Reserve Proposes 12 cent cap on Debit Card Transactions - Visa (V) and Mastercard (MA) Deep Dive

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The stocks of both Visa (V) and Mastercard (MA) took a deep dive just after 2 PM when it was released that the Fed is considering a 12 cent cap on debit card transactions.  Visa has a broader exposure to debit cards, so it seems to be taking the news a bit worse.  While the media will say this is a victory for the consumer, we can be sure retailers will not pass along any of the savings to said 'victorious' consumers - but it's a plus for the retail sector.  Per Marketwatch:

  • If the Fed approves rules, merchants may pay smaller fees on customers’ debit-card transactions. However, a 2009 Government Accountability Office report that looked at credit cards said it’s difficult to prove whether reducing fees would benefit consumers.  “Merchants may pass on their interchange fee savings through lower prices to consumers; however, the extent to which they would do so is unclear,” according to the GAO report. “The degree of savings depends on whether or not merchants are increasing their prices because of higher interchange fee costs.”

It appears the average debit transaction fee was 44 cents last year or 1.14%.  For nothing more than being a transaction mechanism for electrons of fiat money moving from 1 location to another.
  • According to the Fed, last year the average interchange fee for all debit transactions was 44 cents per transaction, or 1.14% of the transaction amount.
44 cents down to 12 cents is quite a blow; about a 70% haircut.

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Visa is approaching lows of the year (I believe the first swoon was when this news was first being debated in Frank Dodd, but the thought process was the final decision would not be punititve and the stock rebounded) while Mastercard has fallen to the 200 day moving average.  Could be an overreaction - we'll see.  Still 2 of the most bullet proof long term businesses on the planet, but these stocks are heavily owned by the hedge fund community - many of which appear to have turned into the momentum trading community.




Via Reuters:
  • U.S. banks and other debit card issuers could not charge retailers more than 12 cents per transaction under a Federal Reserve staff proposal released on Thursday.  News of the proposal sent shares of Visa Inc and MasterCard Inc down more than 10 percent.
  • Banks and transaction processors like Visa and MasterCard collect fees from retailers every time a customer buys something with a debit card. The fees total more than $20 billion annually.
  • The Fed staff proposal on so-called debit "interchange" fees seeks comment on two alternative fee structures, but both limit the maximum fee to 12 cents per transaction.
  • It also seeks comment on how to adjust fees based on fraud-prevention costs. Banks and transaction processors want regulators to broadly define those costs, and allow them to recover such costs through the interchange fees.
  • The proposal tries to prevent issuers from evading the new regulations by prohibiting them from receiving "net compensation from a network for debit card transactions."
  • The Fed board is expected to vote shortly on the staff proposals, with a comment period that would end Feb. 22.
  • The crackdown is part of the sweeping Dodd-Frank financial reform bill signed into law in July, and comes amid a broader government tightening of credit and debit card practices.
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