Visa Drops on Wal-Mart Lawsuit - Analyst Blog

Visa Inc. V shares dropped almost 3% to $212.09 per share on March 28, 2014 over three trading sessions in the wake of a lawsuit filed by the world's largest retailer, Wal-Mart Stores Inc. The suit charged Visa of the huge charges levied on Wal-Mart for transactions made by credit or debit cards.

After the class-action settlement over card fees between 19 merchants and Visa and MasterCard Inc. MA in Dec 2013, Wal-Mart finds the heavy transaction charges by Visa irrational. Wal-Mart opines that Visa in association with banks has been unlawfully raising the card transaction charges and fees have soared as high as over $350 billion between 2004 and Nov 2012.

Although Visa debarred itself from making any comments, the settlement charge is likely to disrupt company financials. As per sources, Wal-Mart has sued Visa for an astounding $5 billion. The previous class-action settlement in Dec 2013 was approved by a judge at $5.7 billion of which Visa had to pay $4.4 billion. However, several retailers had opted out of the settlement then, Wal-Mart being one such name. It has thus now sued Visa separately, adding to more financial damages for the company.

Conflict between the retailers and cared issuers has been a prominent issue in the recent times. Retailers have been continuously complaining against the billons of dollars in “swipe” or “interchange” fees for card transactions. Such huge fees translate into almost 2% of the value of a transaction and thus weigh heavily on the retailers' pockets.

Visa faces several state and federal lawsuits, such as litigations, where interchange rates are violated, as well as those involving currency conversion practices and pricing structure. These caused the company to offer significant discounts and other incentives to the U.S. merchants to steer clear of cardholders of a particular network.

The above-mentioned settlement charges will add further to Visa's expenses thereby adversely affecting margins. Lawsuits and related settlement charges not only affect the company financials, but also hamper the company goodwill, thereby weighing on investor sentiment.

Visa currently carries a Zacks Rank #3 (Hold). However, other better-ranked in the financial services space which look attractive at current levels include World Acceptance Corp. WRLD and Tree.Com, Inc. TREE. Both stocks carry a Zacks Rank #2 (Buy).