Visa Jumps on Fed’s Fee Caps, Upside Muted for Now
Last week, the Federal Reserve voted to cap the swipe fees at 21 cents per transaction vs. the original plan that called for a 12 cents fees cap the Fed proposed in December last year. Shares of Visa (NYSE:V) and MasterCard (NYSE:MA), the world’s two largest payment networks, jumped almost 10% after this announcement. [1] The 21-cents fee cap is still well below the current average of 44 cents that the banks receive on debit card purchases. The cap will reduce revenues for the industry by around $9 billion a year, which will impact card companies as well as U.S. banks like Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC).
We have a price estimate of $86 on Visa, which is slightly less than the current market price.
The cap on swipe fee will pressure Visa’s assessment feem and we previously estimated that it would fall to 0.078% from its current value of 0.093% based on a 12-cents swipe fee. The 21-cents cap on swipe fee will reduce the assessment fee to nearly 0.085%. This represents $2 upside to our price estimate of Visa and it will bring our price estimate near to the current market price so is not meaningful in the near-term.
We expect Visa’s authorization and settlement fee per transaction to drop from $0.048 in 2010 to $0.37 towards the later half of our forecast period due to increasing competition and declining cost due to economies of scale. However, after the cap on swipe fees, Visa will try to maintain the current level of authorization and settlement fee make up for the lost revenues on debit card fees.
If Visa could successfully maintain the current level of authorization and settlement fees without impacting the growth in the number of processed transactions, our price estimate for Visa would jump by another $5.
See our full analysis of Visa.
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