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Thursday, December 16, 2010
From Bloomberg:

Visa Inc. and MasterCard Inc. plunged more than 12% in New York trading after the Federal Reserve Board proposed rules that may slash debit-card interchange fees by 90%.

The new rules, posted today by the Fed on its website, may aid retailers and cut profit for lenders who reaped about $15 billion from such charges last year. Terms outlined by the Fed include a plan with caps of 12 cents per transaction. The fees currently average about 1%.

The result could be an 80% to 90% drop in the fees that Visa and MasterCard pass on to banks, according to Tien-tsin Huang, an analyst at JPMorgan Chase & Co. Jason Kupferberg, an analyst at UBS AG, said investors had been expecting a 40% to 60% reduction.

"Visa is still reviewing the specific elements of the recommendations," said Will Valentine, a spokesman for the San Francisco-based company, in an e-mailed statement. "We cannot comment in detail on the proposed regulations until we have had a chance to fully consider their implications."

Visa fell $9.82, or 13%, to $67.12 at 3:08 p.m. in New York Stock Exchange composite trading, the most in two years. MasterCard dropped as much as 12%, its biggest one-day slide ever, before recovering to $222.04, an 11% drop.

The central bank is crafting the caps on "swipe" fees, also called interchange, to comply with financial curbs that Congress passed in July. Analysts have said the limits could erode profit for Visa and MasterCard. By contrast, the new rules may cut costs for retailers such as Wal-Mart Stores Inc. and Target Corp.

Network Choice

"Setting a cap ensures that no issuer is able to receive an interchange fee at an unreasonably high level," said Janet Yellen, Fed vice chairman, in a memo outlining the proposals.

The Fed also proposed rules that would let merchants choose from at least two independent debit networks for routing transactions, potentially creating more competition for Visa and MasterCard.

To compensate for the lost profit, banks may eliminate rewards on debit cards and charge some customers for using them, increase fees on deposit accounts and promote other products that aren't covered by the regulations, such as charge cards that require consumers to pay their bills in full each month, McDonald said.

The debit caps were part of a measure pushed by U.S. Senator Richard Durbin, an Illinois Democrat whose new rules permit retailers to refuse credit cards for purchases of less than $10 and offer discounts based on the form of payment. It exempts lenders with assets of less than $10 billion and reloadable prepaid debit cards, which are used to distribute government benefits such as Social Security.

Credit Cards

The industry has escaped attempts to regulate interchange on credit cards, which average about 2% per transaction, saying the fees are needed to compensate for the risk of lending money. Debit fees don't have that problem because cash is immediately deducted from the consumer's checking account.

The so-called Dodd-Frank financial overhaul requires the Fed, which writes regulations on electronic payments, to complete the rules by April 21 and implement them by July 21. Today's vote will open a public comment period, after which the Fed board will meet to vote on the final rules.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.