Visa, MasterCard Slammed on Fee Rules

Visa and MasterCard shares were dropping after the U.S. Senate passed a measure that would curb debit card fees.
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fell Friday after the U.S. Senate tacked amendments onto the larger financial reform bill still winding its way through Congress that could curb debit card fees.

The amendments would give the Federal Reserve oversight of interchange fees and allow merchants to negotiate minimum purchase amounts for card use.

Visa's stock was down more than 7% to $79.45, a level the stock hasn't hit since November, and MasterCard shares pulled back about the same to $216.22, which is territory they haven't been in since October. Shares of competitors

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were also impacted, dropping 3.1% and 2.3%, respectively.

Visa and MasterCard, the two larger electronic payment networks, have been relatively shielded from the worst of the financial crisis. Both companies earn fees by charging banks to issue cards on their networks. They also generate fees from each transaction swiped as well as a percentage of total purchase volume per bank. Neither company holds credit card loans on their balance sheet.

What to do about the interchange fees has been a hot debate between the electronic payment processing networks and bank customers like

Bank of America

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JPMorgan Chase

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Wells Fargo

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The fees for using debit cards are currently set by Visa and MasterCard, and the card-issuing banks pass the cost along to merchants. There has been considerable controversy surrounding alleged interchange abuses, including a host of lawsuits against both Visa and MasterCard alleging the overcharging of the fees to merchants.

Senator Richard Durbin (D-IL), the sponsor of the bill, contends that Visa and MasterCard have continued to raise fees while processing costs have actually decreased. While the Fed would not set the debit card fees, it would oversee the debit interchange fees that are set by the card networks to "ensure that they are 'reasonable and proportional' to cost," according to Durbin's release.

The bill also "aims to give merchants ability to accept specific cards / type of cards or charge a fee for using a specific card, to allow merchants to have choice of accepting card payment when transaction amount is below a certain level," according to a research note to clients by Morgan Keegan analyst Robert Dodd.

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The Senate passed the measure late Thursday with a bi-partisan vote of 64-33.

"High swipe fees are yet another way that banks and credit card companies hurt small businesses by charging fees that cut into already tight profit margins," he says in a statement. Durbin's amendment does not affect credit card interchange fees and exempts banks with less than $10 billion in assets.

The passage of the amendment and potential for it to be included in the larger financial reform package could mean that revenue both Visa and MasterCard garner through processing fees could be curtailed.

Not surprisingly, both Visa and MasterCard oppose the bill.

"The amendment to the financial regulation reform bill approved today by the Senate will reduce competition and hurt consumers," MasterCard said in a statement. "The company continues to oppose the amendment approved in the U.S. Senate that is designed to increase profits for big box merchants at considerable expense to consumers, community banks, and credit unions."

Visa plans to continue to work with policymakers to educate them about what they say is a "flawed" piece of legislation "that imposes price controls on debit products and allows retailers to dictate which payment card is used by consumers at the point of sale," according to a statement.

"Debit products deliver significant incremental value over cash and check, including guaranteed payment to merchants, greater security and increased sales, all of which the Durbin amendment ignores," Visa says.

Bank of America Merrill Lynch analyst James Kissane took bearish perspective on the amendment's passing.

"We view the passage of the amendment as a negative for both Visa and MasterCard. Approximately 57% of Visa's U.S. purchase volume is from debit, while

roughly 41% for MasterCard," according to Kissane's note to clients. "More importantly, legislative/regulatory actions in the U.S. (on the heels of Visa Europe's debit interchange settlement with the European Commission) could advance regulation efforts in other countries as well."

He rates Visa at neutral and MasterCard at underperform.

Still as card networks concentrate on the overall trend from exchanging cash payments to electronic forms of payment and extending their franchises internationally, the limits placed on U.S. debit card fees, is not likely to break either firm.

Morgan Keegan's Dodd reiterated his outperform rating on both Visa and MasterCard, noting that there will be "limited downside effect on the payment networks in the long-term," according to the note.

--Written by Laurie Kulikowski in New York.

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