Visa, Mastercard reach US$30b swipe fee deal

US banks to see modest hit if antitrust settlement approved by court

US banks could see a modest hit to their earnings due to the US$30 billion (RM142 billion) settlement to limit credit and debit card fees for merchants by payments networks Visa and Mastercard, Wall Street analysts said.

The antitrust settlement announced on Tuesday is one of the largest in US history.

If approved by court, it would resolve most claims in a nationwide litigation that began nearly two decades ago.

Swipe or interchange fees, paid by merchants, typically includes small fixed fees plus a percentage of total sale amounts, and averages about 1.5% to 3.5% per transaction, according to Bankrate.com.

“On a preliminary basis, we estimate the impact at around 1%-2% of EPS before any mitigation efforts using retail card volumes, but interchange fees can vary significantly by transaction,” J.P. Morgan said in a note.

Brokerage Evercore ISI said the move to reduce and cap interchange fees impacts issuing banks that generate revenue through the charges and will not be financially material to Visa and Mastercard.

“The removal of anti-steering restrictions and by enabling competitive pricing, we could see merchants encouraging more cash transactions or cheaper debit transactions,” it said.

As part of the settlement terms, Visa and Mastercard have agreed to reduce swipe rates by at least four basis points – 0.04 percentage points – for three years, and ensure an average rate that is seven basis points below the current average for five years.

Wall Street analysts expect banks to absorb a large part of the revenue loss by sharing the impact with both card networks and trimming reward expense.

Cards are among the most lucrative and stable streams of revenue for lenders, but most large banks do not disclose what they charge as interchange fees and the amount typically varies according to the card type.

“Small banks and credit unions may object to this deal or try to fight it,” TD Cowen analysts said in a note.

“This is because it could give Walmart or another big retailer the ability to cut a deal with a mega bank for a credit card that provides a discount when used at checkout.”

The brokerage flagged the settlement as a potential risk to Capital One’s US$35 billion deal for Discover Financial , which is expected to face tough anti-trust scrutiny.

“A bigger Capital One could try to use its card issuance advantage to lock in discounts to further expand its customer base,” it said. – Reuters