Last week, the Federal Reserve voted to cap the swipe fees at 21
cents per transaction vs. the original plan that called for a 12
cents fees cap the Fed proposed in December last year. Shares of
Visa (NYSE:V) and MasterCard (NYSE:MA), the world's two largest
payment networks, jumped almost 10% after this announcement. The
21-cents fee cap is still well below the current average of 44
cents that the banks receive on debit card purchases. The cap
will reduce revenues for the industry by around $9 billion a
year, which will impact card companies as well as U.S. banks
like Bank of America (
We have a price estimate of
$86 on Visa
, which is slightly less than the current market price.
The cap on swipe fee will pressure Visa's assessment feem and we
previously estimated that it would fall to 0.078% from its
current value of 0.093% based on a 12-cents swipe fee. The 21-cents
cap on swipe fee will reduce the assessment fee to nearly 0.085%.
This represents $2 upside to our price estimate of Visa and it will
bring our price estimate near to the current market price so is not
meaningful in the near-term.
We expect Visa's authorization and settlement fee per
transaction to drop from $0.048 in 2010 to $0.37 towards the
later half of our forecast period due to increasing competition and
declining cost due to economies of scale. However, after the cap on
swipe fees, Visa will try to maintain the current level of
authorization and settlement fee make up for the lost revenues on
debit card fees.
If Visa could successfully maintain the current level of
authorization and settlement fees without impacting the growth in
the number of processed transactions, our price estimate for Visa
would jump by another $5.
See our full analysis of Visa.