Late afternoon yesterday, both Visa and Mastercard, two of the world’s largest payment networks, plunged more than 10% on the proposed debit card interchange fee cap. Visa, which was trading at over $79.16, fell to $67.19 and MasterCard fell to $223.49 from a high of $253.35.
So what is an Interchange fee?
Say you shop at Target and pay for your purchase using a signature based debit card issued by your bank, say Chase, that carries either a Visa or a MasterCard logo.
When Target swipes your card, Visa/MasterCard charges Target’s bank 1% of your purchase as interchange fees. Whether you shop for $10 or $3000, it’s a flat 1% which is quite significant. This charge of course, is borne by you, the consumer as this is factored into the price of the merchandise.
Now you have to remember, this is not a credit card transaction, but a debit card transaction – your money leaves your account pretty quickly! And for you, the consumer, it is equivalent of paying cash. Yet, Visa/MasterCard will charge Target’s bank 1% for the privilege of using their logo and their network.
What is the proposed cap?
The Dodd-Frank bill proposal is to cap this fee at 12 cents. This news sent the shares of both Visa and MasterCard plunging down. Debit card fees total more than $20 billion annually.
Why this might be a buying opportunity for investors?
Here’s the kicker. Visa or MasterCard is not the recipient of this fee. This fee is passed on to the card issuing bank, Chase in our example, as an incentive for carrying the V/MC logo.
This actually affects revenue stream of the three largest card issuing banks – Chase, BofA and Wells Fargo. Neither of the banks saw a significant drop in their share prices.
Of course, this makes it less attractive for Banks to push Debit cards to consumers and that’s an opportunity loss for Visa and MasterCard. But is it worth a 10% drop in its share price?