Visa (NYSE: V ) warned of slower growth in revenue and earnings for fiscal 2012. The news comes after the Federal Reserve issued its final regulation on debit card fees. This not only affects Visa, but several other companies in the space, too.
What did the Fed say?
The Federal Reserve capped the much-talked-about debit card "swipe fee" at $0.21 to $0.24 per transaction, which means merchants now need to pay much less to banks for debit card transactions than earlier. This could mean lower revenues for banks, as well as the network operators. So what is there to cheer about for the financial industry?
Well, the noteworthy point here is that following this regulation, network providers such as Visa and MasterCard (NYSE: MA ) have been relieved of some lingering uncertainties.
The Fed had earlier proposed a fee cap of $0.12 per transaction, which would have translated into a cut of almost 73% from the current average charge of $0.44. But now, with the cap doubled from that nadir, companies such as Visa can halve their earlier estimated revenues losses, which I suppose is a silver lining.
Since the fee cap is applicable from Oct. 1 this year, these firms can freely charge the current fees in the upcoming quarter. Accordingly, Visa has reiterated its forecast of annual revenue growth of 11% to 15% and earnings-per-share growth of more than 20% for the current fiscal year which ends Sept. 30. For the next fiscal period, the company projected lower growth rates, which was expected by the investment community.
Things look pretty much the same for the other payment giant, MasterCard. One company that is in a comparatively better position now is TCF Financial, which filed a suit against the rule since it gets significant revenue from debit card fees. The company, which earned $111 million from debit cards last year, could have lost almost 80% of its future earning power if the cap been fixed at $0.12. Though TCF will still lose a substantial sum, it can breathe a little easy with a lower potential loss.
The banking scene
Since banks get lower fees now, Visa's and MasterCard's margins could be affected if volumes of cards issued by banks drop. They might also have to reduce fees charged from banks.
The new regulation, in fact, has a more direct effect on card-issuing banks than on network operators. Taking a cap of $0.12 into account, annual revenue loss for card issuers was estimated at around $14 billion, according to credit card information provider CardHub.com. The revised cap will mean lower losses for them as well.
KeyCorp (NYSE: KEY ) now estimates its revenue loss from lower interchange fees between $50 million and $60 million, half of its earlier estimate of $100 million. Bank of America (NYSE: BAC ) , which had estimated an annual revenue loss of $2 billion beginning in the third quarter of 2011, can now expect it to be around $1 billion. Same goes for other big banks such as Wells Fargo (NYSE: WFC ) , which had estimated a revenue loss of $325 million per quarter earlier.
But the bigger point to appreciate here is this: We're quickly moving to a cashless society, and banks don't really have much of an option here. They're essentially stuck between a rock and a hard place. They can't kill their debit programs or customers will take flight, and they clearly can't maintain their prior profitability in the segment without making significant changes.
The next move
Banks can always look at other sources of revenue to offset any fall due to the debit card fee cap, which they certainly will do. Put simply, they can charge higher or additional fees for existing products from consumers or remove certain benefits to lower costs. In fact, Wells Fargo has already done away with debit card reward points for new customers. Along the same lines, JPMorgan Chase (NYSE: JPM ) has stopped awarding reward points. Visa has also started planning ways to make up for lost revenue.
In this case, a company like American Express (NYSE: AXP ) could gain since it makes a lot of money on prepaid cards instead of debit cards, which do not fall under the purview of the current debit card rules. But the biggest gainers are the retailers that have been fighting the battle for a long, long time. Though they would have been happier if the earlier cap remained, the current proposal still means cost savings for them -- a battle won.