A landmark ruling in a federal case regarding debit card fees could potentially cost the kings of plastic billions. When and if the hype materializes, which companies are standing to weather this financial storm, and come out the other side stronger?
The Judge Has Spoken
On July 31, a U.S. district court invalidated a rule concerning fees charged on debit-card transactions. Judge Richard Leon handed a victory to a band of retailers who had sued the Federal Reserve for capping debit card fees at $0.21 per transaction. The cap took effect in October 2011 as a response to the 2010 financial overhaul law, and was the first-ever limit on debit cards.
The Fed first proposed a $0.12 cap, but “buckled under pressure” from bank lobbyists when it decided to raise the cap by $0.09, according to the coalition of retailers. Leon’s ruling stated that the Fed disregarded Dodd-Frank regulations by “inappropriately inflating all debit card transactions by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.”
The Future of “Swipe Fees”
Guggenheim Partners, a financial service company with more than $180 billion under management, predicted in a note released to investors hat debit fees are likely to be cut by more than 50% as result of the court decision. According to Guggenheim, fees will likely revert to the $0.07 to $0.12 per transaction that was originally proposed by the Fed.
However, fees will not be lowered until the Fed adopts new standards. Leon’s decision expressed that the process of developing new rules should take “months, not years.” Guggenheim Partners predicts that current rates will remain in place through 2014 or longer, as the Fed is likely to appeal the decision.
Wall Street Reacts
The court ruling was made public in the middle of the trading day on July 31. Immediately after Wall Street comprehended the news , Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA) and American Express Company (NYSE:AXP) all experienced sudden mini-crashes. Visa Inc (NYSE:V) finished the day down a thundering 7.54%. Mastercard Inc (NYSE:MA), buoyed by the stunning quarter it had reported that morning, finished up 1.53% after turning negative briefly, while American Express Company (NYSE:AXP) suffered a decline of 1.89%.
Visa Inc (NYSE:V) reacted most severely as a result of its massive exposure to the global debit card industry. According to a report released by Nilson Report, a leading global payment industry market research company, on April 1, Visa held a 72.7% share of debit transaction globally, compared to the 22% slice for Mastercard Inc (NYSE:MA) and 5.3% position for UnionPay. Neither company breaks down revenue generation by segment in their annual reports, making it difficult to determine how much debit transactions account for overall company revenues.
The court ruling in no way harms America Express. The company possesses zero exposure to the debit card market, and the ruling does not affect its credit card operations. However, American Express Company (NYSE:AXP) was driven lower with the rest of the industry, potentially presenting a buying opportunity for investors looking to position in the company.
Looking Towards Tomorrow
The court ruling is substantial. Debit card fees could be cut in half, which could cost Visa and Mastercard Inc (NYSE:MA) millions. However, the Fed is very likely to appeal, and even if it doesn’t, the process of forming the new rules and implementing them will likely be long and strenuous.
When and if fees are cut, Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) stand to lose the most. Still, overall transactions growth and the introduction of new fees will likely offset a good chunk of that lost revenue.
Investors should track the progress of the new rules and any potential Fed appeal, in addition to any reaction by Mastercard and Visa Inc (NYSE:V) to the decision.
American Express Company (NYSE:AXP) has no exposure to the debit card market, and thus was unfairly sent tumbling on the day of the decision. This unfounded drop could present a buying opportunity for investors looking to invest in the company.
As an overall investment, Mastercard Inc (NYSE:MA) appears to be the most attractive company, as its mix of high volume growth and healthy market share in both the debit and credit markets should position the company to prosper into the future.
All in all, even as debit card fees are likely to be cut within the next couple of years, Mastercard and Visa Inc (NYSE:V) should be able to whether the storm, and sustain massive profits for years to come.
The article The Debit Card Kingdom May Be Crumbling originally appeared on Fool.com and is written by Ryan Guenette.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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