Impact of Durbin Interchange Amendment on JP Morgan, Bank of America

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The Federal Reserve, in its board meeting on Thursday Dec 16, 2010,  is expected to announce measures to limit the interchange fee that banks charge retailers when the customer uses a debit card. The rule is mandated by the Dodd-Frank bill and expectations call for around a 50% reduction in interchange fees for a bank. If implemented, the U.S. banking industry overall could lose $9 billion out of the near $23 billion in fees banks collect each

These changes will impact those companies that collect fees from merchants such as Visa ( V ) and MasterCard ( MA ) and pass these on to the issuing banks such as Bank of America ( BAC ) and JP Morgan ( JPM ).

A typical credit card transaction involves four parties: the merchant accepting the card, the merchant's bank, the card user and the bank that issued the card. When a credit card users make a purchase using his or her card, the merchant is charged a transaction fee by its bank that typically includes a fixed charge plus a percentage of the amount charged. The merchant's bank then pays a portion of this transaction fee to the card issuing bank for the risk that the card user might not pay. This fee is the interchange fee.

Bank of America

Card fees as a percentage of purchases for Bank of America have already shown a sharp decline from 3.3% in 2008 to 1.5% in 2009 due to the changes in consumption pattern because of global economic slowdown and a further decrease in interchange fee by 50% will cause card fee as a percentage of purchase to decline to about 0.7% in 2011.

This would result in about a 4 to 5% decline in the$17.10 Trefis price estimate for Bank of America.

JP Morgan

We estimate that JP Morgan's card fees as a percentage of purchases is around 1.75% currently andJP Morgan stands to lose nearly $2 billion in revenues annually if the interchange fee is reduced by roughly 50% going forward. This would result in about a 5% decline in $48 Trefis price estimate for JP Morgan.

See our full estimates for Bank of America and estimates for JP Morgan.




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: BAC , JPM , MA , V

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