American Express Co. was the latest card issuer to take a hit in the aftermath of the proposed Dec. 16, 2010, outline by the Federal Reserve Board to regulate debit interchange fees. In an investor conference call held Dec. 20, analyst Chris Brendler, of Stifel, Nicolaus & Co., downgraded AmEx shares from "buy" to "hold," triggering a sharp decline in share value.
Earlier, shares of Visa Inc. and MasterCard Worldwide fell because of the news from the Fed. Although AmEx does not issue debit cards and is not the target of the proposed debit interchange fee cap of 12 cents per transaction, as is the case with Visa and MasterCard, Brendler wrote in a published report that he foresees "an inevitable shift against AmEx as merchants become increasingly focused on payment costs."
Responding to the latest development, Ken Musante, President of California-based ISO Eureka Payments LLC, commented, "The decline in card issuer stocks reflects the market's reaction to the unexpected response from the Federal Reserve. What the markets were expecting to see was a 50 to 75 percent drop in the interchange on debit, not the 90 percent proposed.
"The issue is that with this uncertainty out there, and obviously what they're worried about with AmEx is if debit is so much cheaper than credit, will merchants start doing away with American Express to the benefit of Visa, MasterCard and Discover?" Musante added.
Paul Martaus, President of the payment consultancy Martaus & Associates believes the proposed regulations will have no direct impact on AmEx, but because there is an "outside possibility that someone may ... control interchange on credit cards, they could possibly lose some profitability because they're the highest-cost credit card."
Martaus pointed out that the entire press is "stuck on the idea that the Fed has decided to lower the cost, or cap the cost, at the point of sale at 12 cents. That's wrong. The 12 cents that they're talking about is a cap on interchange, not on the swipe fee at the point of sale. Nowhere is the Fed allowed to determine the cost at the point of sale. That's the retail cost."
The developing consensus among payment experts is that new payment models will emerge as a countermeasure to federal regulation of debit interchange fees, but what the future holds remains speculative.
When debit interchange regulations were adopted in Australia, the impacts were immediately evident. "The formerly free debit cards in one year jumped to $131 a year for every consumer," Martaus said. "The second thing that happened was every reward program in the country went away overnight. The third thing that happened was that consumer prices at the point of sale went up."
Sage Payment Solutions President Greg Hammermaster said in a statement, "Regulatory impacts on payment networks can cause marketplace disruption - from the potential for new bank fees placed on debit cards driving down debit card use to the potential of powerful new loyalty-driven payment solutions from large retailers grabbing a larger piece of consumers' wallets."
Martaus speculated that debit cards could be supplanted with a program referred to as a "relationship account," which takes into account both debit and credit.
"When the transaction hits the system to be authorized, it will go against a line of relationship-related credit and then be settled in the back-end of a debit account," he said.
"There is no current interchange rate yet determined for a relationship type account." Consumers are likely to pay annual fees for such accounts, he added.
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