Visa, Banks Make Sense of Swipe Fee Cap Fallout

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Visa, Banks Make Sense of Swipe Fee Cap Fallout

By Melissa Kress, Convenience Store News - 07/07/2011

SAN FRANCISCO -- Now that the swipe fee rate has been set, at least one major debit card issuer is preparing for the fallout.

Just one week after the Federal Reserve Board issued a final 21-cent cap on debit card transaction fees, Visa Inc. updated its financial outlook for fiscal year 2011 in a conference call late Wednesday. The information, coupled with select metrics for fiscal year 2012, were included in a Form 8-K filed with the Securities Exchange Commission after market close.

"We remain confident that Visa will continue to thrive," said Joseph Saunders, chairman and CEO.

On balance, he explained, the final cap was an improvement over the proposed 12-cent cap the Fed put forth in December. Saunders said he is happy the board included an additional 0.05 percent of the transaction amount for fraud prevention. And most importantly, the implementation date was pushed back until Oct. 1, which allows Visa to work with its clients during the implementation phase, he added.

While Saunders continues to believe there will be unintended consequences from swipe fee reform, "we think the impact will be manageable based on the environment as we see it," he said. "Visa is ready to compete in a new debit environment."

He further explained that Visa expects to feel the full impact of the Durbin Amendment -- which set swipe fee reform in motion -- in the company's next fiscal year. "Fiscal year 2012 will bear the weight of the regulations financially speaking," Saunders said, noting that fiscal year 2013 will rebound with normal growth off 2012.

In the meantime, Visa is in the process of readying several strategies to deal effectively with the Fed's new rules. "The finalized rules give us clarity to begin implementing our plans," Saunders said. Those could include a two-tier debit card transaction system; however, he declined to give details on these strategies at this time. He did note that the company will be releasing its third quarter 2011 financial results and he expects to discuss the strategies further at that time.

Meanwhile, a new report from Moody's, one of the largest credit ratings agencies, acknowledged that the new cap on debit card fees will cost Wall Street billions of dollars in revenue, although the impact could have been much worse if the Federal Reserve had gone ahead with its original proposal. By capping fees at 21 to 24 cents per transaction, rather than the 12 cents originally proposed, the banking industry will save some $3.5 billion in revenue each year, the report stated.

TD Bank and TCF Financial are among the firms expected to gain the most from the relaxed regulations, according to Moody's. Wells Fargo and Bank of America are expected to lose roughly $1 billion in annual revenue, according to the report.

However, Moody's said it expects the banks will make up that shortfall by raising annual fees for debit cards and/or cutting reward benefits. "Our view is that most, if not all, of the lost revenue will be made up gradually, probably over a period of several years, through a variety of revenue enhancement measures," Moody's stated.