WSJ reports "The Federal Reserve dropped a bombshell on Visa and MasterCard, proposing that interchange fees for debit-card transactions be capped at 12 cents. But the market's fast and furious reaction, shares in both companies each plunged more than 10%, may prove too harsh"
According to Bloomberg, the "result could be an 80 percent to 90 percent drop in the fees that Visa and MasterCard pass on to banks." The reduction was much more than analysts were predicting which resulted in a dive in Visa and MasterCard stock prices.
These new rules are due to the financial reform act that was passed by Congress in July. Under the new law, the Federal Reserve is directed to establish standards to ensure interchange fees are "reasonable and proportional." The new rules are to take effect on July 21, 2011.
From page 13 of the draft of the Fed's proposed rules, there's a good summary of the current interchange fees:
From page 13 of the draft of the Fed's proposed rules, there's a good summary of the current interchange fees:
The average interchange fee for all debit transactions was 44 cents per transaction, or 1.14 percent of the transaction amount. The average interchange fee for a signature debit transaction was 56 cents, or 1.53 percent of the transaction amount. The average interchange fee for a PIN debit transaction was significantly lower than that of a signature debit transaction, at 23 cents per transaction, or 0.56 percent of the transaction amount.
And on page 58 there's a summary of the proposed interchange fee cap:
The Board proposes a cap of 12 cents per transaction because, while it significantly reduces interchange fees from current levels (approximately 44 cents per transaction, on average, based on the survey of payment card networks), it allows for the recovery of per-transaction variable costs for a large majority of covered issuers (approximately 80 percent). The proposed cap does not differentiate between different types of electronic debit transactions (e.g., signature-based, PIN-based, or prepaid)
It's interesting to note that the cap is fixed at 12 cents and does not vary with the purchase amount. Also note that signature-based and PIN-based purchases would have the same cap. Say goodnight to Signature Debit and a Big Hello to Chip and PIN...
