Visa ‘risks losing the most’ from new Fed debit card rules, analyst says

By Emilie Bary

The Federal Reserve recently updated rules that are supposed to provide more competition in the debit card market, but another analyst says the final rule is “less onerous than originally proposed.”

The Federal Reserve’s new consolidated guidelines on debit card routing could impact the financial performance of payments technology companies, but the latest rules weren’t as onerous for card companies as they could have been. be, according to analysts.

The Federal Reserve issued an update Monday evening stating that debit card issuers such as Visa Inc. (V) will need to enable at least two payment card networks for debit card processing, including for cards online and other “card-not-present” transactions. The rules are “essentially similar” to a proposal from last year, the Fed said.

Monday’s update indicates that the final implementation deadline will be July 1, 2023.

The latest update serves to clarify Rule II of the Durbin Amendment, which sets out the rule on alternate throughput routing options. When the Durbin Amendment was passed in the shadow of the financial crisis, it sought to rein in the financial industry by capping debit card trading and mandating routing choice. The thought of lawmakers at the time was that the routing requirement would increase competition and reduce processing fees.

The problem resurfaces now because the original implementation of the so-called Reg II focused more on in-store transactions: debit card users may be used to seeing Visa debit and PIN debit options when checking out. payment at the supermarket, for example.

More than a decade ago, “the market had not developed solutions to broadly support multiple networks for cardless debit card transactions,” the Fed said Monday, but now “the technology has evolved to overcome these obstacles.

While the latest update isn’t particularly surprising given its similarities to a draft order released about a year ago, Visa “stands to lose the most” from the changes, according to Barclays analyst Ramsey El- Assal. Visa has a “substantial market share” in the U.S. debit card market, he noted.

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While El-Assal was unsure how much market share Visa could lose as a result of the latest routing guidelines, he felt that “a reasonable best-to-worst-case range to consider” would be 1% to 3% net – headwind on Visa revenue.

If Visa were to give up market share, Mastercard Inc. (MA) could absorb some of that share, he noted. Fiserv Inc. (FISV), which runs the alternative STAR network, and Fidelity National Information Services Inc. (FIS), which runs the NYCE network, also stand to gain.

“This would be similar to Visa’s loss of PIN debit market share following implementation of the original Durbin Amendment eliminating network exclusivity (although Visa may have recovered significant share loss over time through pricing innovations),” El-Assal wrote.

Jefferies analyst Trevor Williams estimated the rule could mean a negative profit impact of around 3% for Visa, although he thinks Mastercard could also see a negative profit impact of perhaps be 2% per share. The changes could mean “a 3% tailwind for FISV on STAR stock gains,” he added in a note to clients.

Williams said the rule was “less onerous than originally proposed,” which could help Visa and Mastercard limit stock losses.

“Under the final rule, issuers need only ensure that each debit card can be processed on at least two unaffiliated networks – although two networks may ultimately not be available to a merchant if, for example, the ‘one of the two networks enabled on the card is not accepted by the merchant (probably, given the smaller acceptance footprints for STAR, NYCE, Pulse, etc.),’ he commented.

A Visa spokesperson did not respond to MarketWatch’s request for comment on the rule, while a Mastercard spokesperson declined to comment because the company was still reviewing the post.

The Fed’s latest update seemed to suit traders well.

“This decision is particularly important given the dramatic shift to e-commerce during the pandemic and the increased use of mobile apps and digital wallets for in-store purchases,” said Doug Kantor, executive committee member of the Merchants Payments Coalition. , in a Liberation. “These transactions represent a rapidly growing part of our country’s economy, and the Fed has closed a major loophole that allowed them to escape the competition Congress intended.”

The Fed said in its Monday statement that “many debit card issuers, and in particular most community bank issuers, are already compliant with the final rule,” but the announcement still prompted pushback. from the financial sector.

“Imposing this final rule would increase enforcement and fraud costs for smaller financial institutions, on top of everything they do to fight inflation, all to the benefit of big-box stores and large online retailers. like Amazon,” Dan Berger, president of the National Association of Federally-Insured Credit Unions, said in a statement to MarketWatch.

It’s been a turbulent time in the card routing world, as Sen. Dick Durbin, a Democrat from Illinois, and Sen. Roger Marshall, a Republican from Kansas, released a statement on Monday saying they were looking to attach their credit card routing proposal as an amendment to the defense budget. The Durbin Amendment introduced alternative routing requirements to the debit market, and this latest legislation aims to apply similar rules to the credit landscape.

Read more: Bill targeting Visa and Mastercard is ‘still alive’, but final path ‘looks like a move of desperation’

Analysts generally saw a low probability of success for this initiative.

“Adding to the defense bill is difficult because amendments that are irrelevant tend to be thrown out,” Cowen & Co. analyst Jaret Seiberg wrote in a note to clients.

Seiberg added, “It’s hard for us to see why leaders would want a big fight that could hurt political giving in a presidential election cycle.”

-Emily Bary


(END) Dow Jones Newswire

10-04-22 1702ET

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