The EU’s New Regulations Could Affect MasterCard The Most

The European Commission, the European Union’s antitrust regulator, is planning to limit interchange fees charged from merchants by banks on the use of credit and debit cards. ^[1] The fees are generally set by card companies like Visa (NYSE:V) and MasterCard (NYSE:MA), and vary from around 0.2% of the value of transactions in the Netherlands to 1.5% in Poland. The European Commission has suggested that the fee system is anti-competitive and the charge that retailers incur is passed on to customers. The commission has recommended that interchange fees be limited to 0.2% for debit card transactions and to 0.3% for credit card transactions. The proposal will be discussed by EU members and the European Parliament before being implemented.

Visa is unlikely to be affected by the new regulations since Visa Europe is a wholly separate company to Visa Inc. However, MasterCard will be greatly affected by the implementation of the new rules since nearly a third of the company’s gross dollar volume (GDV) comes from the continent. American Express (NYSE:AXP) employs a closed-loop model wherein it acts as both the acquirer or merchant’s bank and the issuer or the cardholder’s bank, and will not be affected by the proposed limitation on interchange fees.

Our price estimate for MasterCard is $547, in-line with the current market price.

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Although MasterCard does not directly charge merchants or consumers, it charges assessment and transaction fees from its banking clients. Assessment fees account for around 35% of MasterCard’s revenues, and are charged from issuers and acquirers as a percentage of the billing currency equivalent of transactions carried out by the institution using MasterCard products while transaction fees account for 30% of the company’s net revenues and are charged on the basis of the number of transactions processed for each customer. In effect, the interchange fees charged by banks from merchants are passed on to MasterCard.

MasterCard currently charges an average assessment fee of around 0.1% of the GDV of the transactions processed for a banking client, but is likely to see a reduction in the amount as the new regulations are implemented. We will keep a close eye on developments and update our coverage as and when the new regulations come into effect.

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1. EU Plans Limit on Credit-Card Fees, Wall Street Journal, July 17, 2013 [↩]