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Credit Cards' Crunch Is Retailers' Relief

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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:


Potential Swipe Savings


$1.8 billion

CVS Caremark (NYSE: CVS  )

$430 million

Best Buy

$220 million


$210 million

Rite Aid (NYSE: RAD  )

$115 million

GameStop (NYSE: GME  )

$40 million

Wendy's/Arby's (NYSE: WEN  )

$18 million

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 (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.

Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart. Best Buy, Lowe's, and Wal-Mart are Motley Fool Inside Value picks. Best Buy and are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a bull call spread position on Best Buy, writing covered calls on GameStop, and writing puts on Lowe's. The Fool owns shares of Best Buy. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2010, at 8:22 PM, xetn wrote:

    Just another government intervention into the business of exchange. Companies agreed to pay credit card fees to gain sales. Consumers liked the convenience. But then everyone complains about the "high" cost of this convenience. The simple answer is just pay cash.

    I just have to ask, if two parties agree to a price of something, what business is it of the government or anyone else for that matter? Nobody stuck a gun at anyone's head to make these agreements. But the government sticks a gun at anyone who disagrees with their regulations or refuse to pay the protection money (taxes).

  • Report this Comment On August 11, 2010, at 12:41 PM, cpwdad wrote:

    What this analysis doesn't include, and what Congress intended in passing the recent regs, is that retailers would pass those savings on to customers in the form of lower prices. Ok, stop laughing. This is so typically Washington -- make promises to benefit the average consumer, when in the end, it is the consumer who ends up paying more. In this case, it will cost more to use debit as banks will assuredly make up the lost revenue. And no relief will pass through from the retailers.

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