On Aug. 30, The Wall Street Journal reported that Visa (V -0.23%) and Mastercard (MA 0.07%) planned to increase the fees that most merchants pay when accepting customers' credit cards. It said that the price hikes would go into effect in October and April.
The article quoted CMSPI, a consulting firm that works for merchants, which said the changes could result in an additional $502 million annually in merchant fees. The increased fees would be a drop in the bucket for Visa and Mastercard, which generated $31.8 billion and $23.6 billion in revenue over the past 12 months and could lead to further regulatory scrutiny.
On Tuesday, Visa and Mastercard responded, vehemently disagreeing with the assertions in the article. Here's what investors need to know.
Why regulators are zeroing in on credit card "swipe fees"
Visa and Mastercard have been under the microscope of regulators and legislators for some time. Last year, Sens. Dick Durbin (D-Illinois) and Roger Marshall (R-Kansas) introduced in Congress the Credit Card Competition Act, a bill that featured regulatory changes intended to increase competition in the payment processing market.
The act would require banks with assets of more than $100 billion to process electronic credit transactions on no fewer than two affiliated networks, one of which must be outside of Visa's or Mastercard's network. Supporters say the bill would save consumers money, increase competition in the payments space, and break up the duopoly held by the two processors.
According to Doug Kantor, chief counsel at the National Association of Convenience Stores, the bill could potentially reduce swipe fees for merchants by $11 billion or more annually. The legislation did not pass last year, but Durbin, Marshall, and two new co-sponsors -- Sens. Peter Welch (D-Vermont) and J.D. Vance (R-Ohio) -- have reintroduced it, and hope the bill can get a stand-alone vote later this year.
Mastercard and Visa's response to the report
In response to The Wall Street Journal, Mastercard stated, "The reporting relies upon a report produced by an advisory firm advocating for legislation currently under consideration in Congress." The company disputed the claims in the report and said it has no plans to raise its interchange rates or network fees in the U.S. this fall.
Visa didn't outright say that it wouldn't raise its fees, but did say in a recent blog post that "despite strong growth in the use of Visa cards, our overall interchange fees on Visa transactions have been flat for the past decade." Not only that, but the company said that it has introduced programs designed to lower interchange fees, and last year, it reduced fees by 10% for 90% of U.S. businesses.
It also said that it had spent $10 billion on security innovations that have prevented $30 billion in fraud in the past year alone. Additional innovations have been rolled out this year, and, the company asserted: "If fully implemented, these fraud prevention and security products would lead to an estimated $500 million in online fraud reduction over the next year and more than $30 billion in increased sales by improving authorization rates of online transactions for merchants."
Mastercard and Visa agreed that while new regulations could potentially lower costs for merchants, they could have negative consequences for consumers, including compromised security, a loss of rewards programs, and higher prices for goods and services.
The legislators argue that the new rules will save customers money, but there are disagreements about whether that will be the case. In 2010, Congress passed similar legislation on swipe fees for debit card purchases. The theory was that merchants would pass along their savings to customers.
Multiple studies since then have shown that the legislation had little to no effect on retail prices. A report from the Federal Reserve Bank of Richmond found that more than 21% of merchants increased their prices after the rule went into effect.
In addition, banks (which earn a cut of every card transaction) wanted to compensate for their lost fees, and did so by offering fewer free checking accounts and hiking their monthly fees on interest and non-interest-paying checking accounts. Not only that, but banks offered fewer debit card rewards programs.
Investors should keep a close eye on legislative developments
If Congress passes this legislation, it could affect the fees the companies collect, impacting both card processors and banks. According to The Hill, one source close to talks believes the bill has the votes to pass.
Regulators and credit card processors have sparred in recent years, and long-term investors will want to pay attention to how this plays out. While the potential new regulations could affect Visa and Mastercard, I don't believe this news is enough for shareholders to justify selling the stocks right now.
