Despite pending government regulations aimed at limiting the fees a bank can charge retailers for debit card transactions, payment processors Visa Inc. and MasterCard Inc. remain an attractive option for investors, according to an analyst report.
THE OPINION: William Blair & Co. analyst Chris Shutler initiated coverage of the two companies on Monday, giving the stocks an "Outperform" rating.
In a research note on Thursday, Shutler said the companies are well positioned to capture a greater slice of the electronic transactions market, given that more than 80 percent of the world's transactions still involve cash or checks.
The companies already have 2.7 billion cards in circulation combined.
A slowly improving U.S. economy is another positive factor. Credit card payments volume, a key indicator of discretionary spending by consumers, accelerated in February, Shutler noted.
Still, the companies' revenue could dip soon due to a pending rule that would slash the fees that banks charge merchants for processing debit card transactions. The per-transaction fees could fall to 12 cents, from an average of 44 cents for PIN-based purchases and 56 cents for signature-based purchases.
Both MasterCard and Visa, along with banks and credit unions of all sizes, are lobbying Washington to delay the rule or change it. Shutler expects the fees will go forward but be delayed.
About 14 percent of MasterCard's total revenue is U.S. debit fees, but its market share is much lower than Visa's, so MasterCard should pick up share from the elimination of certain network exclusivity arrangements under the proposed regulations, Shutler said.
The rule changes have potentially more of an impact on Visa, which gets roughly 30 percent of its total revenue from U.S. debit transaction fees, according to Shutler.
Still, he said even a worst-case impact on Visa's revenue has largely been priced into its shares, which have underperformed the S&P 500 by 23 percent since changes were approved as part of a broader Wall Street reform bill last May.
Visa has said it has strategies ready for when the rule takes effect, including increasing the size of its international business, which wouldn't be subject to the rule.
THE STOCK: Visa shares rose 16 cents to close Friday at $76.47, while shares in MasterCard fell $1.29 to $267.68.