Visa And MasterCard Face The Heat To Reduce Fees

July 11th, 2012 by Trefis Team
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Credit card operators Visa (NYSE:V) and MasterCard (NYSE:MA) are expected to reach an agreement to settle a lawsuit filed seven years ago by retailers, accusing the companies of charging excessive fees and conspiring to steer market sentiments. [1] Although the trial for the case is scheduled to begin in September, Visa and MasterCard have engaged in at least three settlement conferences since last December and are likely to avoid being drawn into a legal battle by opting for an out-of-court settlement.

Merchants have been pushing for the right to charge a surcharge fee on credit card transactions, which would help them offset the transaction fees charged by credit card companies. MasterCard and Visa are expected to follow the example set by industry peers Discover Financial (NYSE:DFS) and American Express (NYSE:AXP) who allow retail merchants to surcharge customers as long as they also surcharge transactions made on other payment  networks.

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Surcharging would afford merchant groups greater control over costs, and would further supplement the ability to offer selective discounts to customers using low-cost cards over those using high-cost cards, which they gained via a settlement last year. In addition to allowing surcharges, the card companies are also expected to cut interchange fees, which are collected by banks as revenues and also pay the defendants around $8 billion to $12 billion. The interchange fees on debit cards were cut in half by the Durbin amendment to the Dodd-Frank bill last year, leaving credit card fees unaffected, much to the disappointment of merchants who have to defray these fees.

A slowdown in consumer spending owing to global economic uncertainty as well as a dip in consumer confidence [2] in the face of high unemployment rates will take a toll on transaction volumes in the coming months. [3] As Visa and MasterCard depend on these volumes for their business, it is likely that they will reduce transaction fees to offset the surcharge charged by merchants to retain customers.  The duo are also facing pressure in Europe to reduce cross-border fees. (See Europe Says Fair Play Is The Order of the Day for MasterCard)

We will keep a close eye on the proceedings of the case as it unfolds. Our $126 price estimate for Visa’s stock is in-line with the current market price. You can gauge the effect of a change in the forecast by modifying the chart above.

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Notes:
  1. Merchants May Gain Right to Surcharge Card Customers Under Potential Settlement, Wall Street Journal, 9th July, 2012 [↩]
  2. Consumer Confidence Declines in June, According to the Discover U.S. Spending Monitor, Press Release, Enhanced Online News, 3rd July, 2012 [↩]
  3. UBS downgrades Visa, MasterCard on weak consumer spending, Reuters, 9th July, 2012 [↩]