Credit Card Issuers, Have No Fear!
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Last month Visa (NYSE: V), MasterCard (NYSE: MA), and roughly a dozen U.S. card-issuing banks offered to pay a combined $7.25 billion to settle a price-fixing lawsuit.
If a judge approves the offer, it will be the largest antitrust settlement in history.
The lawsuit, filed in 2005, claims that credit card issuers violated anti-trust laws by forcing high swipe-fees on retailers. The suit notes that card issuers forbid merchants from giving discounts to customers who use alternate payment methods.
The terms of the settlement will allow retailers to offer customers a discount for paying in cash.
Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C) are among the dozen banks that have agreed to contribute funds towards the settlement. A Bank of America spokeswoman described the settlement as fair. Citigroup and JP Morgan spokespeople declined to comment.
Will the settlement terms shrink the profits of Visa, Mastercard and the banks that issue those cards? Will it mark a permanent decline on the transaction fees that credit cards companies collect? Will credit card and bank stocks plummet if the judge approves the settlement?
My response: No, no and no. Here’s why:
#1: The Settlement is a Slap on the Wrist
A $7.25 billion settlement sounds hefty until you view it in context: Credit card issuers collect $50 billion in swipe-fees each year, according to the National Association of Convenience Stores. That’s $350 billion in swipe-fee revenue just in the seven years since the 2005 lawsuit was filed.
In that context, $7.25 billion amounts to little more than a slap on the wrist, especially once you dig into the terms of payment: $1.2 billion of that amount comes in the form of a future swipe-fee discount, valid for the next eight months.
#2: Alternate Payment Discount Off to Slow Start
Retailers may soon be able to offer customers a discount using alternate payment methods, but old habits die hard; most consumers aren’t willing to shed the convenience of plastic in exchange for a few pennies off, particularly when ATM fees are reaching new highs.
The larger threat to Visa and Mastercard’s way of life is the emergence of new mobile point-of-sale technology that allows people to pay through their smartphones. This technology embodies everything the average consumer loves: It’s convenient, immediate and fraud-protected. Yet even this new technology has been slow to catch on, partly because of security complications and partly because of a lack of consumer enthusiasm/demand. It may take years before mobile payments become the new way of life, and credit card issuers are more keen to focus on that adaptation than a small handful of retailers and consumers who opt for a cash discount.
#3: Eyes on Europe
Despite the historic settlement offer, what topics are the company executives discussing in their sales calls? The decline in the euro and the Brazilian real. A one-cent move in the difference between the U.S. dollar and the euro translates to an $11 to $13 million impact on Mastercard’s revenue, according to a Jefferies Group analyst (as quoted in Bloomberg News).
Mastercard’s $790 million share of the settlement total, in other words, is the equivalent of a 60-cent move in the dollar/euro conversion. Credit card companies are more threatened by currency fluctuations than by antitrust settlements.
The Bottom Line
Don’t worry about the impact of this settlement, as historic as it may be. In the grand scheme of things, it won’t affect the credit card issuers too much.
PaulaPant has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and MasterCard. Motley Fool newsletter services recommend Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
