No Easy Ending In Sight As Fed Battle Over Debit-Card Transaction Costs Rages On
The U.S. Federal Reserve is stuck in fight over debit-card transaction costs between banks and retailers.
In a Bloomberg article, reporter Andrew Zajac wrote that the Federal Reserve is in the U.S. Court of Appeals at the commencement of the Durbin appeal today defending the decision to cap swipe fees at 21 cents. Zajac noted that this ceiling could cost financial firms $8 billion per year.
Banks are arguing that the cap is too low to cover costs and make a profit. Retailers report that they continue to be gouged, with the average swipe fee cut to 44 cents. The National Association of Convenience Stores (NACS) and other merchants envisioned a swipe fee of no more than 12 cents. Bloomberg noted, “The Fed's appeal is the latest step in a more than four-year battle over a $16 billion revenue stream for banks that has pitted retailers of all sizes.”
In July, U.S. District Judge Richard Leon in Washington threw out the swipe-fee cap. Judge Leon ruled that the Federal Reserve “clearly disregarded Congress's statutory intent by inappropriately inflating all debit-card transactions by billions of dollars.” He added that the central bank factored in cap costs it wasn't allowed to consider under law and that the Fed failed to boost card transaction processing networks competition.
Visa (NYSE: V) and MasterCard (NYSE: MA) own the payment networks and set the fees under the Federal Reserve's cap. Zajac reported on a comment in a filing where Congress gave the fed “broad discretion” to work “as an arbiter in determining reasonable and proportional fees.”
With continued news of the debate, financial analysts are coming forth with their opinions and price target changes on Visa and MasterCard. Andrew Jeffrey from SunTrust Robinson Humphrey noted that Visa is “closing the relative valuation gap on MasterCard.” Jeffrey reported that he expects this gap to continue to decrease despite early arguments heard in the Durbin appeal of Judge Leon's ruling suggesting that “merchants may face a steep burden of truth.”
SunTrust further commented on the Durbin appeal noting, “We persist in saying that dual-signature debit routing is an unlikely outcome. For many reasons, some technical and others legal, we put the likelihood of transaction-level routing choice as low.”
Deutsche Bank research analyst Bryan Keane reported, “Although difficult to predict, legal experts we have spoken to believe the most likely outcome is the appeals court either rejects Judge Leon's decision or grants a partial decision, allowing further cuts to debit interchange, but keeps routing rules unchanged. Either of these two outcomes is likely to drive the multiple of Visa's shares higher and remove much of the uncertainty.” Keane raised the price target on Visa from $226.00 to $268.00 and on MasterCard from $756.00 to $909.00.
Shares of Visa closed on Friday up 4.69 percent at $232.18. MasterCard closed at $818.42, down 0.42 percent.
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