A proposal to regulate fees paid by US retailers on debit card swipes in the Senate’s financial reform bill led to a sharp drop in the shares of Visa, MasterCard and leading banks on Friday.
The amendment would enable the Federal Reserve to alter so-called interchange fees, or the fees paid by merchants to issuers of debit cards such as Citigroup or JPMorgan Chase.
It was sponsored by Dick Durbin, senior Democratic senator from Illinois, and approved late on Wednesday night.
Investors saw potential impact on revenue for Visa and MasterCard – which collect the interchange fees and pass them to the banks – from reduced payments by the banks to use their networks and additional regulatory scrutiny.
Banks received $15.8bn in interchange fees on debit card transactions from US merchants last year, according to the Nilson Report.
“If the Durbin amendment becomes law, the question is, will the Fed regulate not just the pure interchange fees, which are revenue only for the issuing banks, but also Visa and MasterCard’s debit fees?” said Jason Kupferberg, an analyst at UBS.
The credit card payment network companies – once industry utilities that were spun off and sold to the public in recent years – saw their shares dip sharply.
Visa fell 9.9 per cent to $77.26, and MasterCard dropped 8.6 per cent to $212.45.
However, both have seen their share price recover more than 45 per cent since 2009 as consumer spending has revived, along with the use of credit and debit cards.
“Nothing in Durbin’s amendment directly impacts Visa or MasterCard’s revenues or earnings-per-share, in our view,” said Adam Frisch, analyst at Morgan Stanley. “The biggest harm, at least near term, to the stocks could be the perception that this bill hinders growth.”
Mr Durbin is a long-term critic of the fees, which merchants have argued are too high because the payment system does not have enough competition.
“Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high ‘swipe fees’ charged by Visa and MasterCard,” Senator Durbin said.
David Robertson, of the Nilson Report, a payment industry newsletter, said: “Merchants are willing to a large degree to pay for credit transactions, because they figure consumers might be spending money they don’t have. But with the debit card, it’s the consumer’s own money, and so merchants want to pay the lowest fee possible.”
In a statement, Visa said: “We hope Congress sees today’s amendment for what it is – an attempt by retailers to increase their profits at the expense of consumers.”
MasterCard issued a similar statement calling on lawmakers to reject the amendment.
Analysts discounted the likelihood the rules would become law. “We still think interchange fails to make it into the final compromise bill, given that key influential lawmakers in the House remain against it,” said Christopher Mammone, analyst at Deutsche Bank.
The largest bank issuers of debit cards were also hit. Citigroup was down 2.7 per cent to $3.98, JPMorgan slipped 2.3 per cent to $39.89 and Bank of America was off 3.1 per cent to $16.34.
However, in spite of the broad regulatory uncertainty hanging over the industry, the S&P 500 financial sector is still up 6.6 per cent in 2010, compared with a gain of 1.9 per cent for the overall S&P 500 index.
Over the past month, risk premiums – or spreads – on bank bonds have risen from 60bp to 130bp.
But both Citigroup and Morgan Stanley were able this week to raise money by selling new bonds.