Sixth Sense Says 12 Cents Nonsense

by Peter Eichenbaum and Carter Dougherty for Bloomberg

Dec. 17 (Bloomberg) -- Visa Inc. and MasterCard Inc. may face permanent damage to the fastest-growing part of their business after the Federal Reserve proposed rules that could cut debit-card transaction fees by 90 percent.  “It is negative all around,” wrote Scott Valentin, an analyst at FBR Capital Markets, in a note to clients. “This significantly impacts the business model for the networks.”

Visa and MasterCard, the world’s biggest payment networks, plunged more than 10 percent in New York trading yesterday after the Fed proposed capping so-called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 percent of the purchase price, regardless of cost, and pass that money along to card-issuing banks.

The change, if approved by the Fed after a public comment period, would wipe out most of an estimated $15 billion in annual revenue for U.S. lenders that issue Visa and MasterCard debit cards, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co.

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Debit Fee Rules Crush Visa And MasterCard

The Fed just issued new rules on debit card fees, and the fallout is a steep drop in shares 
of Visa and MasterCard. The rules specifically target "interchange" or the fees card companies
make from businesses when cards are used. Bloomberg estimates U.S. lending companies make about $15 billion on this annually. That's MasterCard in red, down 9.46%, and Visa in blue, down 10.98%

Read more: http://www.businessinsider.com/fed-rules-debit-cards-visa-mastercard-2010-12#ixzz18Nm5V5ta

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Debit Card Players Blindsided by Federal Reserve

The debit card industry's big names are modestly rebounding this morning, after being hit hard yesterday from the Durbin Bill.  Yesterday, Visa Inc. and MasterCard Inc. plunged more than 12 percent in New York trading after the Federal Reserve Board proposed rules that may slash debit-card interchange fees by 90 percent.   

Shares of Mastercard, Visa , & American Express are all rebounding this morning, with Mastercard and Visa up a little over 1%. Shares of Mastercard and Visa particualrly were hit yesterday, both down around 10% on concerns that the Durbin Bill would hit earnings for these companies.

The U.S. Federal Reserve yesterday released its draft proposal for debit interchange rules and is now soliciting public comment.

The Board is requesting comment on two alternative interchange fee standards that would apply to all covered issuers: one based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction). Under both alternatives, circumvention or evasion of the interchange fee limitations would be prohibited. The Board also is requesting comment on possible frameworks for an adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention.

Comments on the draft proposal are due by February 22, 2011. The draft rule proposal also includes an interesting summary of industry feedback the Fed gathered through is outreach program.

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Fed Cuts Debit Fees by 90%, MasterCard and Visa Stock Prices Plummet

The Federal Reserve released proposed rules today that would slash debit card interchange fees that banks get when we use debit cards.   

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:

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...

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Federal Reserve Confirms: Consumers Could Pay for $16 Billion Retailer Windfall

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WASHINGTON, Dec. 16, 2010 /PRNewswire/ -- Today, the Electronic Payments Coalition issued the following statement in response to the Fed issuing its draft rule on debit interchange rates:

The Federal Reserve has been limited a rushed, politically-motivated action from Congress. The Federal Reserve acknowledged, both in today's meeting and in the staff memo to the Federal Reserve Board, that this government price fixing could result in significant additional fees on debit cardholders – with no guarantee that merchants will pass any savings to their customers.

With 81% of all debit card dollars being spent at the top 1.5% of retailers, these big box stores could reap upwards of $13 billion as a result of this proposed rule – money that will directly hit consumers in the form of higher costs to own and use a debit card. The changes forced by this rule will inject UNCERTAINTY into a growing system that serves tens of millions of Americans every day – and will threaten the core of our fragile economic recovery.

About Electronic Payments Coalition

The Electronic Payments Coalition is dedicated to protecting consumer value, choice, and competition in electronic payments systems. The coalition is a broad-based group of payment card networks, financial services companies, and financial services trade associations whose primary goal is to educate policy-makers, consumers, and the media about the value of electronic payments systems — including economic growth, convenience, speed, reliability, and security — and to ensure the continued growth of global commerce by promoting consumer choice and the stability of the vast payment networks that connect millions of consumers with millions of retailers each and every day.

SOURCE Electronic Payments Coalition

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Visa Inc, Responds to 12 Cent Debit Cap

December 16, 2010 08:20 PM Eastern Time 

Visa Statement Regarding the Federal Reserve’s Recommendations on the Dodd-Frank Act

SAN FRANCISCO--(BUSINESS WIRE)--“Visa has received the initial recommendations of the Federal Reserve related to the debit card regulation provisions of the Dodd-Frank Act. At this time, Visa is still reviewing the specific elements of the recommendations.

“We remain confident in Visa’s ability to compete, win and grow in the payments marketplace through a resilient business model in the U.S., aggressive growth strategies globally and as a leader in product innovation in our industry.”

“We cannot comment in detail on the proposed regulations until we have had a chance to fully consider its proposal. It is clear, however, that the Federal Reserve has left a significant number of issues open for additional comment and deliberation in the coming months. Visa also has concerns that the Federal Reserve’s proposal includes artificial caps on debit interchange that do not realistically reflect the value of card acceptance and do not reflect the actual costs of running a secure, reliable and efficient debit network. Further, the proposed routing and exclusivity alternatives put retailer profits ahead of consumer protection, choice and convenience.

“We urge the Federal Reserve to give appropriate consideration to the important issues raised in letters recently sent to Chairman Bernanke by members of Congress, regarding the potential harmful impact the recommendations will have on consumer choice, privacy and data security protections as well as its impact on the ability of small financial institutions to compete effectively.

“Given the importance and complexity of this undertaking, we believe the Federal Reserve must be given additional time to fulfill its responsibilities and to analyze the unintended consequences of the proposals on the industry and consumers.

“We remain confident in Visa’s ability to compete, win and grow in the payments marketplace through a resilient business model in the U.S., aggressive growth strategies globally and as a leader in product innovation in our industry.

“We will provide the Federal Reserve feedback on its initial recommendations and the serious questions they have raised as soon as possible.”

Contacts

Visa Inc.
Will Valentine, 415-932-2564
globalmedia@visa.com

Permalink: http://www.businesswire.com/news/home/20101216006939/en/Visa-Statement-Federal-Reserve%E2%80%99s-Recommendations-Dodd-Frank-Act

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MasterCard: New Debit Rates Will Harm Consumers

Image via Wikipedia

December 16, 2010 05:08 PM Eastern Time 

Federal Reserve Regulations Would Harm Consumers, Provide Windfall to Large Merchants

PURCHASE, N.Y.--(BUSINESS WIRE)--MasterCard Worldwide said today that the proposal issued by the Federal Reserve fails to follow the statutory directive to consider the full range of costs incurred by issuers to operate their debit card programs. If adopted as proposed, the regulations would shift merchant costs directly to consumers.

“This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.”

“Experience demonstrates that consumers, not banks or payments networks are the biggest losers as a result of this regulation,” said Noah Hanft, MasterCard’s general counsel. “This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.”

MasterCard Worldwide is reviewing the draft regulations proposed by the Federal Reserve and plans to file formal comments in the coming weeks as part of the public comment period.

About MasterCard Worldwide

As a leading global payments company, MasterCard Worldwide prides itself on being at the heart of commerce, helping to make life easier and more efficient for everyone, everywhere. MasterCard serves as a franchisor, processor and advisor to the payments industry, and makes commerce happen by providing a critical economic link among financial institutions, governments, businesses, merchants, and cardholders worldwide. In 2009, $2.5 trillion in gross dollar volume was generated on its products by consumers around the world. Powered by the MasterCard Worldwide Network — the fastest payment processing network in the world — MasterCard processes over 22 billion transactions each year and has the capacity to handle 140 million transactions per hour, with an average network response time of 140 milliseconds and with 99.99 percent reliability. MasterCard advances global commerce through its family of brands, including MasterCard®, Maestro®, and Cirrus®; its suite of core products such as credit, debit, and prepaid; and its innovative platforms and functionalities, such as MasterCard PayPass™ and MasterCard inControl™. MasterCard serves consumers, governments, and businesses in more than 210 countries and territories. For more information, please visit us at www.mastercard.com. Follow us on Twitter:@mastercardnews.

Contacts

MasterCard Worldwide
Jim Issokson, 914-249-6286
James_issokson@mastercard.com
or
Barbara Gasper, 914-249-4565
Investor_Relations@mastercard.com

Permalink: http://www.businesswire.com/news/home/20101216006807/en/Federal-Reserve-Regulations-Harm-Consumers-Provide-Windfall

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First Data Responds to Federal Reserve Board’s Proposed Rules

December 16, 2010 05:38 PM Eastern Time 

ATLANTA--(BUSINESS WIRE)--First Data Corporation, a global leader in electronic commerce and payment processing, today released the following statement in response to the Federal Reserve Board’s publication of proposed rules:

Today, the Federal Reserve Board has published its proposed rules regarding debit card interchange fees and routing under Section 1075 (Durbin) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Before offering detailed comments on these proposed rules and what they might mean, First Data must thoroughly review and analyze them to determine potential implications for our business and that of our merchant and financial institution customers.

A dedicated team of more than 100 payments professionals from across First Data has been focused on Durbin and has considered and prepared for a wide range of alternatives regarding the proposed regulations so that we are prepared to serve the needs of our merchant and financial institution customers.

First Data is prepared to help our merchant and financial institution customers successfully navigate through a dramatically changing payments landscape because we have a unique set of assets – from the nationwide STAR debit network to card issuing and debit processing to prepaid solutions to merchant acquiring/processing. No one else in the payments industry has the same scale and breadth of solutions that we offer.

The proposed rules issued by the Federal Reserve Board also address network exclusivity. Because of First Data’s unique position in the marketplace, we can easily make available to debit-card issuers access to the STAR Network, the second-largest PIN debit network in the U.S., providing access to over 2 million merchant POS and ATM locations. The STAR Network provides an innovative and secure network alternative for merchants.

Around the world, every second of every day, First Data makes payment transactions secure, fast and easy for merchants, financial institutions and their customers. First Data leverages its vast product portfolio and expertise to drive customer revenue and profitability. Whether the choice of payment is by debit or credit card, gift card, check or mobile phone, online or at the checkout counter, First Data takes every opportunity to go beyond the transaction.

Contacts

First Data
Nancy Etheredge, 402-222-6214
nancy.etheredge@firstdata.com

Permalink: http://www.businesswire.com/news/home/20101216006836/en/Data-Responds-Federal-Reserve-Board%E2%80%99s-Proposed-Rules

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NRF Says Federal Reserve Action on Debit Cards Could Lead to Discounts for Consumers

December 16, 2010 04:03 PM Eastern Time 

WASHINGTON--(BUSINESS WIRE)--The National Retail Federation welcomed proposed regulations released today by the Federal Reserve intended to result in “reasonable” swipe fees for debit cards, saying a significant reduction in the fees would result in lower costs for merchants and could lead to discounts for their customers.

“These regulations are a significant step toward reining in credit card industry fees that have driven up prices for consumers for far too long, but we still believe debit card transactions should be honored at face value the same as checks”

“Any reduction in debit card swipe fees at all, large or small, is a benefit for consumers because retailers are highly competitive and will share that savings with their customers – but the law requires a major reduction,” NRF Senior Vice President and General Counsel Mallory Duncan said. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.”

“These regulations are a significant step toward reining in credit card industry fees that have driven up prices for consumers for far too long, but we still believe debit card transactions should be honored at face value the same as checks,” Duncan said. “Debit cards are merely plastic checks that draw from the same bank accounts as paper checks, and there’s no reason they should be treated any differently. We will work closely with the Fed as these regulations are finalized to ensure that the reduction in fees – and the amount of money retailers can offer customers as a discount – is maximized.”

The Fed this afternoon released proposed regulations intended to implement the Durbin Amendment, a provision of the Dodd-Frank Wall Street Reform Act of 2010 signed into law in July. Sponsored by Senate Majority Whip Richard Durbin, D-Ill., the amendment required the Fed to set regulations resulting in “reasonable and proportional” swipe fees for debit cards. The Fed was required to consider banks’ actual costs for processing the transactions and the fact that paper checks drawn on the same accounts are paid at face value. The amendment also barred the card industry from interfering with merchants who offer a discount or other benefit to customers who pay by cash, check or debit card rather than credit card, and allows merchants to set minimum purchase amounts of up to $10 for credit cards.

The proposed regulations will be subject to a 60-day comment period, and the Fed is scheduled to issue a final version by April 21, 2011, with the rule going into effect June 21, 2011.

Interchange is a fee averaging 1 to 2 percent for debit cards and 2 to 3 percent for credit cards that Visa and MasterCard banks charge merchants each time a card is swiped to pay for a transaction. The fees totaled $48 billion in 2008, three times the amount collected when NRF began tracking them in 2001, with debit interchange accounting for about $20 billion of the total. Card industry practices effectively require the fees to be included in the price of merchandise, costing the average family an extra $427 a year, according to NRF estimates. The fees are hidden from most consumers because they are not disclosed on monthly statements and card companies effectively block merchants from showing them on receipts.

As the world's largest retail trade association and the voice of retail worldwide, NRF's global membership includes retailers of all sizes, formats and channels of distribution as well as chain restaurants and industry partners from the United States and more than 45 countries abroad. In the United States, NRF represents the breadth and diversity of an industry with more than 1.6 million American companies that employ nearly 25 million workers and generated 2009 sales of $2.3 trillion. www.nrf.com

www.nrf.com/swipefees

Contacts

National Retail Federation (NRF)
J. Craig Shearman, 202-626-8134
shearmanc@nrf.com

Permalink: http://www.businesswire.com/news/home/20101216006715/en/NRF-Federal-Reserve-Action-Debit-Cards-Lead

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Discover Financial Services Reports Fourth Quarter Net Income of $350 Million or $0.64 Per Diluted Share

December 16, 2010 08:30 AM Eastern Time 

RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported net income for the fourth quarter of 2010 of $350 million, as compared to net income of $353 million for the fourth quarter of 2009. The results for the prior year included approximately $285 million (after tax) related to the Visa/MasterCard antitrust litigation settlement.

“Reconciliation of GAAP to As Adjusted Data”

Full year 2010 net income was $765 million, as compared to $1.3 billion for the full year 2009 which included $1.2 billion (after-tax) related to the Visa/MasterCard antitrust litigation settlement.

Fourth Quarter Highlights

• Discover card sales volume was $23 billion in the quarter, an increase of 6% from the prior year.
• Net interest margin of 9.28% improved 12 basis points as compared to the prior quarter, reflecting the sale of lower yielding federal student loans.
• Credit performance continued to improve, with net charge-offs down $103 million from the prior quarter and a net charge-off rate for the fourth quarter of 6.58%. The delinquency rate for loans over 30 days past due was 3.89%, with delinquent balances declining $181 million in the quarter.
• The outlook for continuing improvement in credit performance led to a $414 million release of loan loss reserves.
• Payment Services processed record transaction volume in the quarter of $40.4 billion with profit before tax up 32% from the prior year.
• Deposit balances originated through direct-to-consumer and affinity relationships grew $1.5 billion in the quarter to $20.6 billion.

"The sustained and significant improvement in the credit performance of the Discover card portfolio led to another very strong earnings performance this quarter," said David Nelms, chairman and chief executive officer of Discover. "We continue to invest in marketing and business development in all of our businesses, which contributed to another quarter of growth in Discover Card spending, as well as record transaction volumes in our third-party credit and debit network businesses. We look forward to capitalizing on the opportunities ahead of us in 2011, including our acquisition of The Student Loan Corporation as we strengthen our competitive position in private student loans."

Segment Results:

Direct Banking

The discussion that follows compares amounts reported for the fourth quarter of 2010 to 2009 on an “as-adjusted” basis¹.

The table below reconciles the 2009 as-adjusted amounts with the relevant measure on an as reported basis where appropriate, and shows the comparable 2010 U.S. GAAP results.

		Quarter Ended				Quarter Ended			Quarter Ended
		November 30, 2009				November 30, 2009			November 30, 2010
		Managed - As Reported		Adjustments		As Adjusted			GAAP
Credit Card Interest Yield		12.75%		0.01%		12.76%			12.68%
Net Interest Margin		9.37%		0.01%		9.38%			9.28%
Other Income		$924		($434)		$490			$404
Provision for Loan Losses		$989		$269		$1,258			$383
Direct Banking Income Before Taxes		$546		($673)		($127)			$554
Allowance for Loan Losses		$1,758		$2,144		$3,902			$3,304
Reserve Rate		7.44%		0.43%		7.87%			6.87%

Direct Banking pretax income of $554 million in the fourth quarter of 2010 was a $681 million improvement from the fourth quarter of 2009, as adjusted.

Discover card sales volume grew 6% from the prior year, the fourth consecutive quarter of year-over-year growth. Credit card loans were $45.2 billion, essentially unchanged from the prior quarter and down $2.3 billion from the prior year, driven by a reduction in promotional rate balances and an increase in the payment rate.

Total loans ended the quarter at $48.8 billion, down 4% compared to the prior year reflecting a decline in credit card loans as well as the previously disclosed $1.5 billion sale of federal student loans. The company classified the remaining $800 million in federal student loan balances as held for sale in the fourth quarter of 2010 in anticipation of selling them in 2011.

Net interest margin was 9.28%, a decrease of 10 basis points from the prior year as adjusted and up 12 basis points from the prior quarter. The decrease from the prior year primarily reflects the impact of legislative changes on credit card yield partially offset by lower interest charge-offs. Net interest margin was up from the prior quarter reflecting the impact of the sale of lower rate federal student loans partially offset by the impact of legislative changes and a higher level of promotional rate balances.

The delinquency rate for loans over 30 days past due declined to 3.89%, an improvement of 142 basis points from the prior year, and 27 basis points from the prior quarter. The net charge-off rate decreased to 6.58% for the fourth quarter of 2010, down 185 basis points from the prior year and 60 basis points from the prior quarter.

Provision for loan losses of $383 million decreased $876 million from the prior year, as adjusted, driven by lower charge-offs and a reduction in the allowance for loan losses. Improvement in the outlook for credit performance over the next twelve months led to a reduction in the loan loss reserve rate, which resulted in a reserve release of $414 million in the fourth quarter of 2010 versus a reserve build of $195 million in the fourth quarter of 2009.

Other income decreased $87 million, or 18% from the prior year as adjusted. The decline was primarily due to lower late fees, the discontinuance of overlimit fees beginning in February 2010 and a $28 million charge related to federal student loans classified as held for sale.

Expenses were up $49 million, or 9%, from the prior year, reflecting increased marketing and advertising spending as well as costs related to The Student Loan Corporation acquisition.

Payment Services

Payment Services pretax income of $31 million in the quarter was up $8 million, or 32%, from the prior year. Revenues were up $9 million, reflecting increased volumes from new and existing clients, as well as higher margins from transactions on the PULSE ATM/Debit network.

Payment Services dollar volume was a record $40.4 billion for the fourth quarter, up 21% from the prior year, driven by higher PULSE and third-party issuer volume. The number of transactions on the PULSE network increased 33%.

Dividends

The company’s board declared a cash dividend of $0.02 per share of common stock, payable on Jan. 20, 2011, to stockholders of record at the close of business on Dec. 29, 2010.

Conference Call and Webcast Information

The company will host a conference call to discuss its fourth quarter results on Thursday, Dec. 16, 2010, at 10:00 a.m. Central time. Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.com.

About Discover

Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company operates the Discover card, America's cash rewards pioneer, and offers personal and student loans, online savings accounts, certificates of deposit and money market accounts through its Discover Bank subsidiary. Its payment businesses consist of Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discoverfinancial.com.

A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company’s Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC’s website (http://www.sec.gov) and the company’s website (http://investorrelations.discoverfinancial.com).

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