Shares of Visa dropped all of a sudden last Thursday. There was a drop by 12.7% (regular trading) and it was a similar scenario for its rival competitor MasterCard (Federal regulation of interchange fees charged on debit cards). The primary source of income for all card companies is the swipe or the interchange fees. Most of the small businesses have in the past complained about the dominance of these two card issuers. Due to the presence of these two card companies in the transaction industry and their monopoly, there is very little room for any other competitor in order to reduce costs.
The interchange fee is around 44 cents per transaction on the debit card, as per the claims made by the Fed. There is speculation that this fee might be reduced to 7 or 12 cents by the Fed. Since these are scary figures, it is no wonder that the investors have decided to dump these stocks, which were once the hottest IPO in 2008.
But is the government justified in making this sacrifice when it is a well known fact that it was Visa and its IPO which was one of the chief reasons for financial institutions to survive the financial debacle during the recession.
This has been a controversial piece of bad news in recent times and all credit card companies are hit by this. American Express has made it amply clear that it will not bow down to the demands made by the Fed. Due to this their stocks crashed from the $43 range to about $38 in the first week of October. However, Visa as well as MasterCard took no such stand and are hence expected to take the direct hit due to all these legislative changes. American Express is very different in many ways as its financial arm remains widely exposed to all the fluctuations in the market. Whereas it is not so with Visa and MasterCard as they license their brands to the banks which take full responsibility on all defaulted payments while these two cards remain mere payment processors. These three are however the main market shareholders in the credit card business.
The Fed`s move to cut the transaction fee by up to 90% will be a big blow to Visa and this in turn will have a ripple effect on the banks that use Visa cards as they would also end up losing on their fees as they get a percentage out of the interchange fee.