It shouldn't… we do not expect MasterCard's stock (
MA
) to fall much further after its 10% decline on Thursday December
16, 2010 because of the proposal by the Federal Reserve to limit
the fees banks can charge merchants for debit card transactions.
Although, the proposed legislation could have a significant impact
on MasterCard's revenue from assessment fees, we estimate that
assessments account for around 20% of the
$214 Trefis price estimate for MasterCard's
stock
.
The Federal Reserve, in its board meeting on Thursday, proposed
a 12-cent per transaction cap on the interchange fees charged by
the banks on debit card transactions. The Fed believes that the
banks should only recover certain items through interchange fees
including the variable costs that are directly attributable to the
authorization, clearance, and settlement of the transaction
(including the transaction fees paid to the card networks). Banks
should not recover other costs of their debit card programs such
as the cost of producing and distributing debit cards, general
costs of deposit accounts, branch costs, and overhead.
Though the proposal would impact major banks that issue debit
cards to their customers, most of these banks have diversified
operations and so debit card transaction revenues form a small
portion of the total bank's business. The banks might also pass on
some of their lost revenues by reducing what they pay to the card
networks such as MasterCard. This is what likely sparked the sell
off following the announcement on Thursday.
Assessment Fees for MasterCard
The Assessment Fee is charged by MasterCard to banks for the
volume of business generated for the banks by MasterCard branded
products. It is expressed as a percentage of Gross Dollar Volume (
GDV
) of the business from MasterCard branded cards. The assessment fee
is dependent on the Gross Dollar Volumes and in 2009, when there
was a dip in GDV, MasterCard increased their assessment fees.
The Fed's proposed limit on interchange fees will also impact
assessment fee percentage and we factored in a drop in our analysis
of assessment fee percentage of MasterCard. We estimate that there
will be about 13-14% drop in assessment fee percentage moving
forward.
However, there could be a 7-8% decline in our price estimate for
MasterCard if the banks decided to transfer the proportional load
of the decrease in interchange fees to MasterCard. This would
result in the assessment fee percentage to drop to about 0.02% from
its current level of 0.1%.
MasterCard's stock has already declined by 10% after the
Fed's announcement of its proposal, which is about 2-3% more
than our estimated downside to the MasterCard's stock. Thus, we do
not expect the stock to fall any further because of the Fed's
proposal.
See our Full Estimates for MasterCard here