Visa, MasterCard Climb as U.S. Mulls Debit Compromise

Visa and MasterCard Climb
Visa rose 6.2 percent in New York Stock Exchange composite trading and MasterCard advanced 5.1 percent. Photographer: Norm Betts/Bloomberg

Visa Inc. and MasterCard Inc., the world’s biggest payments networks, climbed more than 4 percent as the U.S. Congress worked toward a compromise that would protect transaction fees they charge to banks.

The House will seek to maintain the Senate’s proposed cap on debit-card interchange, or “swipe” fees, according to Representative Barney Frank, the Massachusetts Democrat leading talks to produce a final regulatory overhaul bill. The plan from Senator Richard Durbin would empower the Federal Reserve to set fees charged to merchants that are “reasonable and proportional” to the cost of processing debit transactions.

“If the counter-proposal becomes law, Visa and MasterCard still may have to cope with some business-model changes, but these would likely be less than had been feared,” Jason Kupferberg, an analyst at UBS AG in New York, said today in a note to clients.

The compromise prevents the Fed from regulating “network fees” that Visa and MasterCard charge to banks on each transaction as long as the fees aren’t used to “circumvent” interchange regulation, according to Durbin, the Illinois Democrat and majority whip. Reloadable prepaid cards, including those used to disburse government benefits, would be exempt.

The House version also would allow the Fed to consider fraud-related costs in setting interchange rates.

“We were able to reach an agreement which makes minor changes to strengthen consumer protections and bring competition to a market where there is none,” Durbin said in a statement. “We’ve addressed the concerns of states regarding their ability to provide services to the unemployed and the concerns of small financial firms regarding their ability to provide services to the unbanked.”

Shares Rise

Visa rose 5 percent to $80.90 at 5:37 p.m. in New York Stock Exchange composite trading. Purchase, New York-based MasterCard advanced 4.2 percent to $223.34. Shares of both companies had fallen about 14 percent from May 3 through June 18 after Durbin said he would seek interchange limits.

The proposed compromise, which the payments industry opposes, may fail to survive a bipartisan conference committee that is scheduled to debate the interchange amendment tomorrow.

“We continue to have concerns that the ultimate outcome of this legislation would be the passing of merchant acceptance costs to consumers at a time when Americans can least afford it,” MasterCard spokesman James Issokson said in an e-mailed statement. Visa spokesman Will Valentine declined to comment.

$20 Billion in Fees

MasterCard and San Francisco-based Visa set interchange fees and pass the money to card-issuers including Bank of America Corp. and JPMorgan Chase & Co. Interchange is the largest component of the fees U.S. merchants pay to accept Visa and MasterCard debit cards. The fees totaled $19.7 billion and averaged 1.63 percent of each sale last year, according to the Nilson Report, an industry newsletter.

The Senate voted 64-33 on May 13 to include the debit-interchange caps after Durbin agreed to exempt banks with assets of less than $10 billion, or 99 percent of all U.S. lenders. That failed to win the support of groups representing credit unions and community banks, who said the exemption would make their cards more expensive to accept than those issued by bigger banks.

‘Severe Disadvantage’

The proposed compromise “falls far short of safeguarding consumers’ best interests,” Fred Becker, president of the National Association of Federal Credit Unions, said today in a statement. “This legislation would still put credit unions at a severe disadvantage compared to large credit-card issuers.”

On June 16, after 131 House members signed a letter urging the conference committee to strip the debit-cap amendment from the bill, Durbin said he would work to exempt reloadable prepaid cards used to distribute government benefits. At least 10 state treasurers including Shane Osborn, a Nebraska Republican, had said the legislation could hurt those government programs and their beneficiaries.

The industry escaped previous attempts to regulate interchange on credit cards, which average about 2 percent per transaction, saying the fees are needed to compensate banks for the risk of lending money. That argument isn’t relevant to interchange on debit cards, which tap funds held in consumer checking accounts.

Durbin said in a June 17 interview that he’s determined to push through his amendment and counteract the “unregulated power” wielded by Visa and MasterCard. The companies accounted for 91 percent of global purchase transactions made with general-purpose cards last year, according to the Nilson Report.

Network Competition

The compromise legislation would allow merchants to set minimums and maximums for credit-card purchases and offer discounts based on the form of payment. A provision that would have allowed merchants to tailor discounts by card brand was removed and replaced with a measure that directs the Fed to issue rules preventing networks from requiring that their debit cards can only be used on one network.

“Merchants will have the choice of at least two networks upon which to run debit transactions,” Durbin’s statement said. The measure “provides additional competition to a previously non-competitive part of the market.”

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