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
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.
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
In this case, a company like American Express