On Friday, the European Commission (EC -- the lawmaking body of the European Union) criticized MasterCard
Although the statement is only a "preliminary view" to which MasterCard will have the opportunity to respond in an oral hearing, the developments will bear close watching by MasterCard shareholders. Why? To understand the EC's opinion, let's take a look at the way in which this transaction-processing giant makes money.
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While the European Commission has apparently ruled out a fine as punishment, a decision against MasterCard could prohibit interchange fees on cross-border transactions. The EC is concerned that MasterCard restricts competitive activity by setting these fees in advance, so "prohibiting" them could mean any fees would be allowed to "float" (i.e., they would be negotiated on a case-by-case basis). While I don't see the EC's preliminary opinion as favorable to MasterCard's activity in Europe (45% of all payment cards issued in the European Economic Area are under MasterCard brands), we shouldn't expect a final ruling in the immediate future (the previous EC opinion on this matter dates back to September 2003). Furthermore, it's not clear to what extent eliminating pre-set interchange fees would affect MasterCard's ability to extract fees from acquirer and issuer banks.
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The EU's action is one of several significant legal challenges that MasterCard faces (the Legal and Regulatory Proceedings section of its IPO prospectus is 13 pages long!). Although the company's late May IPO is a success so far -- as of last Friday, the stock is up roughly 20% from its offering price -- I believe the stock is bearing a "legal risk" discount. As these actions are resolved and related uncertainty is removed, it will be easier for investors to determine the value of what I think is a terrific franchise.
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Fool contributor Alex Dumortier has a beneficial interest in MasterCard and Microsoft, but none in any of the other companies mentioned in this article. He welcomes your constructive feedback. The Motley Fool has a strict disclosure policy.