Feds Nickel And Dime The System

Apparently the federal government is not finished trying to tinker with bank and finance laws in the hopes of creating a consumer paradise. Unfortunately, the laws of unintended consequences are still in effect, and changes to interchange fees could create a lot of turbulence in the business of processing the millions of debit card transactions that occur every year.

The New Rules
Although nothing is final yet, on Thursday the Federal Reserve proposed significant changes to the debit card processing business. The most important part of the potential new rules concerns the interchange fees that banks receive every time a card is swiped. While transaction fees had been averaging about $0.44, or about 1.1% of the transaction value, the new rule would cap the fee at $0.12 per transaction. Clearly that is a major cut in a line of revenue that had been virtually pure profit for the banking industry. (For related reading, see Watch Out For Changes In Credit Card Agreements.)

Shoot First, Ask Questions Later
While there were expectations that limits of some sort were in the offing, investors were taken aback by the scale of the cut and blasted Visa (NYSE:V) and Mastercard (NYSE:MA), the two largest card network operators. Although these fees are not part of the companies' revenue (even though they set them), investors seem to be making the assumption that banks will push back hard on these networks and demand some sort of concessions in the fees they have to pay to help make up the difference. Apart from the fees, there is also a risk that new rules will come into play that will promote and increase competition in the network space and that could be a direct problem for these companies. 


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