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Visa and MasterCard Face Permanent Damage to Debit Card Business

Strategic Insights

— 2 min read

The Federal Reserve's proposed rule to cut debit-card transaction fees by up to 84 percent could have long-term consequences for Visa Inc. and MasterCard Inc. The rule, which would cap interchange fees at 12 cents each, could wipe out most of the $16.2 billion in revenue generated by debit cards last year for U.S. lenders. Debit cards have become increasingly popular as a substitute for cash, with U.S. consumer spending reaching $1.45 trillion last year, a 8 percent increase from the previous year.

Key Takeaways:

  • The proposed rule would cut debit-card transaction fees by up to 84 percent, which could have a significant impact on the business model of Visa and MasterCard.
  • The average debit interchange fee last year was 44 cents per transaction, or 1.14 percent of the purchase price.
  • Debit cards have become an increasingly popular substitute for cash, with U.S. consumer spending reaching $1.45 trillion last year, a 8 percent increase from the previous year.
  • The proposed cap on interchange fees would align U.S. rates more closely with other countries, including Australia and the 27 nations of the European Union.
  • Both Visa Europe Ltd. and MasterCard have agreed to cut fees in the past, with Visa agreeing to a 0.2 percent rate as part of a deal to end EU antitrust action, and Mastercard agreeing to the same rate last year.
  • The proposed rule could shift merchant costs directly to consumers, with Mastercard's general counsel, Noah Hanft, stating that "experience demonstrates that consumers, not banks or payment networks are the biggest losers as a result of this regulation."
  • The rule could have a significant impact on the number of jobs at Mastercard, with the company's spokesman, Jim Issokson, stating that the changes would mostly affect consumers and would not be affected by the change at the company's facilities in O'Fallon, Mo.

Statistics:

  • $16.2 billion: the amount of revenue generated by debit cards for U.S. lenders last year
  • $1.45 trillion: the amount of U.S. consumer spending with debit cards last year, a 8 percent increase from the previous year
  • 44 cents: the average debit interchange fee last year, or 1.14 percent of the purchase price
  • 12 cents: the proposed maximum interchange fee per transaction
  • 1,800: the approximate number of people employed by Mastercard's Global Technology and Operations division in O'Fallon, Mo

Sources:

  • Bloomberg News
  • Post-Dispatch
  • FBR Capital Markets
  • Visa Inc.
  • MasterCard Inc.
  • Nilson Report
  • European Commission
  • Mastercard Worldwide
  • The Nilson Report

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