After a Stellar Report, Will Transaction-Fee Woes Weigh Visa Down?

The past year has been especially good for Visa (NYSE: V  ) , as evidenced in its latest earnings report. Net income rose 25% year over year, and both transaction rates and payment volume growth have increased. In addition, the company settled a class action lawsuit with retailers regarding swipe fees, potentially resolving an issue that had weighed on the credit issuer for seven years. Visa, it seemed, was looking at an unclouded horizon.

But it was not to be. Shortly after the announced settlement with retailers, there were squawks of protest from business groups such as the National Retail Federation and the National Association of Convenience Stores, claiming that the settlement didn't go far enough to ameliorate Visa and MasterCard's (NYSE: MA  ) iron grip on swipe-fee implementation. Now, both Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) have spoken out against the agreement, griping as well about a lack of structural change in the setting of interchange fees paid by merchants. At this point, the settlement is looking distinctly unsettled.

Now, the EU Competition Commission has slapped a charge on Visa Europe, Visa's licensee that processes card payments across the pond. The complaint says that cross-border interchange fees are too high, squelching competition between European banks and inflating costs for retailers and consumers. This is not the first time Visa Europe has been castigated for sky-high fees: The company agreed to reduce debit card fees less than two years ago to settle accusations in that quarter, too.

Fool's take
If the complaint sticks, the EU commission may levy fees of up to 10% of Visa Europe's annual sales. Since more than 40% of debit and credit cards currently circulating in Europe are Visa-branded, that could take a sizeable bite out of its profits. The company could try to appeal the charges, as MasterCard has done; the first appeal was denied, and MasterCard vows to continue the fight. In the meantime, however, the credit issuer has decided to lower fees to avoid penalties.

As for the problems at home, both credit card companies would like to see the current settlement jell, since analysts note that it doesn't ramp up competition or stop the companies from increasing swipe fees as they see fit. The agreement needs to be sanctioned by a judge, however, who may see the opposition of heavy-hitters like Target and Wal-Mart as salient, putting the deal in jeopardy.

It's even possible that the issue could go the route of debit card fees, which the Durbin Amendment ended up capping. Banks turned around and started trying to make up lost revenue in other areas, which may be a more difficult scenario for card issuers, since the products they offer are much more limited.

Depending on how legal challenges to the debit duopoly shake out, future years may not be as kind to Visa as the last one was.

Credit card companies may be in a state of flux until these issues are resolved, but there are other promising financial stocks. Our analysts have pooled the best of these companies into a special report that profiles The Stocks Only the Smartest Investors Are Buying, including some picks that even Warren Buffet would like. Want more? Read on.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services have recommended buying shares of Visa and creating a bull call spread position in Wal-Mart Stores. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1968372, ~/Articles/ArticleHandler.aspx, 10/24/2014 11:49:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement