To celebrate the holidays, we here at the Fool are devoting extra virtual ink to all things consumer-focused in a special section, "The 12 Days of Christmas." Over the coming week, we'll have our "12 Days of Content" surrounding consumer-focused names that look set to profit or perish from the holiday cheer.
In Christmases past and present, consumers have merrily swiped their credit and debit cards to fulfill sugarplum dreams, enriching retailers, issuing banks, and electronic payment networks alike. As the most widely used electronic payment networks, Visa (NYSE: V ) and MasterCard (NYSE: MA ) have benefited mightily from consumers' shift from paper to plastic, garnering fees on each transaction.
Together, the two companies capture more than 90% of electronic payment transactions, and enjoy a moat built on the network effect: Consumers want to carry the cards most widely accepted by merchants, and merchants want to accept the cards carried by the most consumers. But changes afoot in the world of electronic payments may put some dings in Visa and MasterCard's moat, potentially making Christmases future less merry for their investors.
First, the Federal Reserve has proposed capping interchange fees charged on debit card transactions. While Visa and MasterCard don't generate revenue from the fees, card-issuing banks such as Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ) could see their revenue reduced by the cap, and in turn put pressure on the network fees that banks pay to Visa and MasterCard. By reducing network fees paid to Visa and MasterCard, the banks could minimize their own bottom-line impact of lower interchange fees -- albeit at the credit card companies' expense.
In addition, the question of network exclusivity raised by the Fed's proposal is even more troubling, since it could increase the competition that Visa and MasterCard face from other payment networks. In reaction to the proposal announced last week, both stocks plunged more than 10%, and Visa dropped to a new 52-week low.
Government regulation isn't the only threat on the horizon for the two companies. While Visa and MasterCard have been buoyed by the trend toward electronic payments, the emergence of mobile payments may not work in their favor. Visa and MasterCard are piloting programs that would allow consumers to pay with their smartphones, rather than a credit or debit card. But they are not alone in seeing the profit potential of expanding a smartphone's typical uses. Verizon (NYSE: VZ ) , AT&T (NYSE: T ) , and T-Mobile have partnered to create a mobile payment network known as Isis. With millions of monthly billing relationships with consumers who are never without their phones, it's not hard to see how the carriers could push into Visa and MasterCard's lucrative fiefdom.
So will you be paying for next year's Christmas gifts with your smartphone? Or are the threats to Visa and MasterCard's moat much ado about nothing? Let us know what you think in the comments.