Wednesday, 23 March 2011

Visa’s Two-Tiered Battle Plan To Fight Fed On Debit Fees

Visa is the largest global electronic payment solutions company in the world and has the largest network of credit and debit cards in circulation. The company makes money by providing transaction information and resources between the customer, merchant and their respective banks, collecting a fee based on the number and dollar value of transactions that it processes. Visa competes with other card networks like MasterCard, Discover and American Express.
Our price estimate for Visa stands at $85.03, which is about 19% above the market price.
In a recent House Financial Services Committee hearing regarding the proposed Durbin Amendment, members of Congress questioned the Federal Reserve Governor Sarah Bloom Raskin over the proposed rule and its impact on small banks and credit unions. The Fed proposed in December last year to limit the debit card swipe fee at 12 cents per transaction. The move was supported by merchants and retailers such as Wal-Mart and Target but was opposed by banks such as Bank of America and JPMorgan as it could cost them $12 billion in annual revenues. [1]
The U.S. Senate and House are considering bills to put a hold on the Federal Reserve’s rule over debit card fees. The House bill will put a one year delay and a study on the composition of the interchange fees that will review the costs associated with the debit card transactions and the effect of Fed’s proposal on consumers, merchants and banks.
The assessment fee is charged by Visa to its customers (banks) based on the total payment volume of business generated for customers through Visa branded products. The assessment fee as a percent of gross dollar value of business generated from Visa card has been historically stable at 0.09% during the last five years from 2006 to 2010 but is expected to decline gradually if the Fed’s proposal to restrict debit card swipe fees is implemented.
Visa, in a response to the Fed’s proposal, has said that it will implement a two tier system to allow small and large banks to charge different processing fees. [2] While the effect of two tier system on assessment fee remains to be seen, a delay in Fed’s proposed fee limit would let Visa maintain its current level of fees in the hopes that the law will be amended to repealed. If the fees stayed as is, this would result in about 5% upside to our price estimate for Visa.


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