Saturday, June 20, 2009

Congress Picking on Dynamic Duopoly

Yesterday, in a post entitled: "Dynamic Duopoly Riddled with Legal Issues" I touched upon the fact that the foundation of V/MC's house of cards might be crumbling.  Barron's talks about that fact today as well.
MONDAY, JUNE 22, 2009

Congress Is Picking on Plastic

By JIM MCTAGUE  | MORE ARTICLES BY AUTHOR

Invest in banks, or swim with sharks? Both are dangerous.



SIGNIFICANT POLITICAL RISKS REMAIN FOR THE banking industry, and investors should weigh them carefully before betting on the sector. Swimming with bankers right now might be as crazy as doing the doggy paddle in the middle of a bloody shark tank: You could lose an arm and a leg.

The conundrum for those who see opportunity in the battered sector is that Congress wants more retribution from the bankers for their role in the near-collapse of our financial system. Every action raises costs and reduces industry profits. Regulatory-reform proposals call for higher levels of capital and new layers of regulation, which will be financed by the bankers. The debate probably will drag on for several years, with the headlines driving stocks lower or higher.

There may be more immediate threat in a bill that would lower profits for Visa (ticker: V), MasterCard (MA) and banks that issue their cards and use their payment or networks. The card industry isn't popular. Congress whacked it once this year and is coming back with an even bigger stick.


The first hit occurred May 22 when President Obama signed into law a bill passed by Congress eliminating the most egregious practices of credit-card issuers. No longer can they suddenly raise interest rates on existing balances or charge unexplained fees or issue cards to kids under age 21 without the consent of a parent or guardian.

The law also has a provision ordering the Government Accountability Office to conduct a comprehensive study of credit-card "interchange fees" and their impact on retailers and consumers.

This is huge. These fees, estimated to run between $40 billion and $50 billion per year, are a major source of revenue for Visa, MasterCard and the banks that issue their cards.  Some influential members of Congress assume the study will confirm what retailers have told them for several years -- that the fees amount to price-gouging.


Continue Reading at Barrons
 

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