Could MasterCard's Stock Fall Further from Fee Limits?

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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



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: GDV , MA , V

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