JPMorgan Explains The Impact Of The Fed's New Rule On Visa And Mastercard



Yesterday the Federal Reserve changed rules that cap how much banks charge retailers to process debit card purchases.Banks will be able to charge as much as 21 cents for each debit card transaction starting October, and are expected to lose about 40% of the revenue from debit cards.

In a JP Morgan report analyst Tien-tsin Huang explains why the change in swipe fees is good for Visa and Mastercard:

  • The 21 cents cap on swipe fee has weakened the case for a reduction in network fees for card issuers which has hurt Visa and MasterCard shares for over a year.
  • The Fed has banned banks form routing debit card transactions through any one payments network. The new rules require at least one unaffiliated network on all debit cards. Issuers could satisfy this requirement by adding an independent PIN network which is great for Visa because of its dominant market share, but it could also mean higher share for Mastercard.
  • The interchange cap of 21 cents was higher than the 12 cents proposed by regulars last year, and makes room for an additional charge to cover fraud. Network fees earned by Visa and Mastercard are now part of a list of recoverable expenses. This would weaken the case for a dramatic reduction in card issuer network fees.
  • Visa will update its guidance on July 6 but FY11 guidance is not expected to be impacted by the rule. Investor uncertainty is easing and valuations are expected to go higher.

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