by Joseph Kenny | 07/10/09
As the new regulations on the credit card industry begin to be implemented, it may be that Visa and MasterCard, the world's largest payment networks may see lower revenues and increased pressure on stock prices.
The latest developments include proposals by some members of Congress to make firmer regulations on credit card interchange rates. These are the fees that retailers and merchants are required to pay the financial institutions that issue credit cards.
Obviously, if these new laws were passed, the first to be affected would be the banks that collect interchange fees. Yet, many investors and some analysts are thinking that the banks may attempt to share the burden with MasterCard and Visa, to alleviate concerns prompted by losses caused by bad credit and toxic assets.
Despite the fact that representatives from both Visa and MasterCard said they would not be affected by the legislation because they do not charge interchange feels, the concern of consumers still managed to reduce Visa's share values by 10% in May. MasterCard suffered a 5% drop during the same period. Analysts and investors alike suggested that share prices could fall further.
Prior to the financial crisis, Visa traded it shares at 25 times future earnings while MasterCard's stock was going at about 20 times. Now those shares are trading at about 20 times and 15 times respectively on 2010 earnings.
Interchange fees laws would be implemented in addition to approved legislation that would place limits on interest rates and credit card fees. The legislation would provide merchants and retailers with more leverage to negotiate fairer interchange fees with financial institutions.
In 2008, the interchange fees increased 14% to approximately $48 billion, averaging almost 1.75% of the total purchases.
Again, although Visa and MasterCard are relatively safe from interchange legislation because they don't change them, there is a chance that the card companies may be affected by larger changes in the credit card industry as a whole.