Credit Cards' Crunch Is Retailers' Relief

The recently passed financial reforms promise to cap the fees credit card companies charge retailers every time customers pay by debit cards. The news has prompted jubilation from retailers, grumbling from banks, and a host of potential ups and downs for your investments.

Estimates suggest that retailers paid close to $20 billion in debit-swipe fees in 2009. You can imagine how aghast MasterCard, Visa (NYSE: V), and major card issuers such as Bank of America, Wells Fargo (NYSE: WFC), and JPMorgan Chase are at the prospect of losing any part of that windfall. According to the folks at Moody's Investors Service, those three banks alone -- the biggest American debit card issuers -- stand to lose about $1.4 billion annually.

Don't cry too hard for the big banks, though. What they lose in debit card fees, they'll undoubtedly try to recoup with other new charges.

Retail bonanza
Meanwhile, major retailers have reason to rejoice at the prospect of keeping billions they'd otherwise have to fork over to banks and card processors. They could reap even bigger gains if further reforms also rein in credit card interchange fees. That hasn't happened yet, but with the financial services industry under so much scrutiny these days, it's far from unthinkable.

According to the folks at First Data, shoppers use credit and debit cards in roughly 59% of in-store transactions, a percentage that has been rising over time. Swipe fees for such cards have generally ranged between 1% and 3%. If they fall by just three-quarters of a percentage point, here's what some big and less-big retailers might save in swipe fees alone:

Data: Yahoo! Finance. Based on total revenue over past 12 months, times the 59% figure for in-store credit/debit transactions, times a hypothetical 0.75-percentage-point swipe fee reduction.

If you don't think those look like huge numbers relative to revenue levels, remember that retailers tend to operate with much lower profit margins than many other industries. Consider priceline.com (Nasdaq: PCLN), whose capital-light business model, operating mostly online, helps it achieve a net margin of nearly 22%. Meanwhile, Wal-Mart, the world's most powerful retailer, makes do with a margin of less than 4%, as does CVS, while Best Buy nets less than 3%. If your profit margin is just a few percentage points, giving up one or two percentage points of your revenue to swipe-card fees is a really big deal. Avoiding those charges can substantially boost profits.

While banking investors may want to mull over the ultimate implications of this pending reform, retail investors seem to have much to smile about. An extra shot of profits from caps on card-swipe fees could make already compelling companies even more enticing.

These companies' big dividend yields exceed many retailers' entire net profit margin.