Cap on Debit Card Interchange Fee is a Positive for American Express

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American Express ( AXP ) is a leading financial services company offering credit and charge card products along with travel-related services to consumers and businesses across the globe. The company is the third largest issuer of credit cards in the US, after Visa ( V ) and MasterCard ( MA ).

Our price estimate for American Express' stock is $47.16 , about 5% ahead of market price.

Card Revenues Strongly Tied to Interchange Fees

A key revenue stream for credit card companies like American Express stems from the commission charged to marchants in a card transaction by the card-issuing bank, otherwise known as the interchange fee. The Durbin Amendment, enacted in July 2010, granted the Fed the power to control the levels of this fee. In December, the Fed enforced one such limit - 12 cents per debit card transaction. This limit could represent a loss of $13 billion in revenues for banks issuing debit cards, as per a report by CardHub.com. To compensate for the lost revenue, banks are expected to increase monthly fees on the corresponding checking accounts by $4-$5 in addition to reducing reward programs on debit cards (typically funded by interchange fees).

Debit Card Use on the Riseā€¦ But Fee Limit Could Reverse the Trend

While this does adversely affect the two largest card payments-processing networks Visa and MasterCard, we believe it presents an upside opportunity for American Express. So, what differentiates American Express from the rest of the herd? American Express does not issue debit card products and limits its offering to credit and charge cards issued by itself and other third-party financial institutions.

We previously discussed a report indicating that the number of credit cards in use in the U.S. declined by 8 million over the past year, from 70 million to 62 million (Declining Credit Card Distribution Can Threaten American Express Upside). As most banks already wrote off bad debt during 2008 and 2009, the decline in credit cards in use is unlikely to have come from card cancellations. Rather, the decline is likely a voluntary decision by consumers to take on less debt and could signal an increasing consumer preference for debit cards.

Debit cards have gained market share in aggregate transaction volume at the expense of credit cards since they offer similar payment convenience and rewards benefits without the interest due on outstanding balances that is typical of credit cards. Introduction of the Fed's interchange fee limit on debit card transactions, and the corresponding loss in revenues for card-issuing banks, will likely reduce available rewards benefits to debit card users. The result will be a recovery in the relative attractiveness of credit cards, triggering upside for American Express.

Upside Opportunities for American Express

While a decline in the growth rate of debit cards could adversely impact transaction revenues for Visa and MasterCard, the corresponding rise in credit card usage can directly raise American Express' revenue from card transactions and payment processing. We estimate that this segment generates nearly three-quarters of American Express' stock value.

We currently estimate American Express-issued cards-in-use in the U.S. will grow from 30 million in 2010 to 44 in 2017. As the recent enactment gains traction, there could be upside to our base forecast and $47.16 price estimate for American Express stock.

Similarly, the number of third party-issued cards on American Express' network, which we currently estimate to grow from an estimated 29 million today to 86 million by 2017, could also see upside.

Let us know your projections for total American Express-issued cards-in-use by providing feedback in the comment box below. You can drag the trend line in the modifiable charts above to see the impact of various cards-in-use trends on American Express' stock value.

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You can see our full analysis for American Express here



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AXP , MA , V

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