By Emily Bary
Newly solidified Federal Reserve guidelines on debit-card routing could have some impact on the financial performance of payment-technology companies, but the latest rules weren’t as onerous for the card companies as they could have been, according to analysts.
The Federal Reserve put out an update late Monday saying that debit-card issuers such as Visa Inc. /zigman2/quotes/203660239/composite V -1.04% will have to enable at least two payment-card networks for debit-card processing, including for online and other “card-not-present” transactions. The rules are “substantially similar” to a proposal from last year, the Fed announced.
Monday’s update noted that the final deadline for implementation will be July 1, 2023.
The latest update serves to clarify Regulation II of the Durbin amendment, which set forth the rule about alternative routing options in debit. When the Durbin amendment passed in the shadow of the financial crisis, it sought to rein in the financial industry through caps on debit-card interchange and the requirement for choice in routing. The thinking from lawmakers at the time was that the routing requirement would increase competition and lower processing fees.
The issue is resurfacing now because the original implementation of so-called Reg II focused more on in-store transactions: Debit-card users may be familiar with seeing options for Visa debit and PIN debit when paying at the supermarket, for example.
More than a decade back, “the market had not developed solutions to broadly support multiple networks for card-not-present debit-card transactions,” the Fed said Monday, but now “technology has evolved to address these barriers.”
Though the latest update isn’t particularly surprising given its similarities to a draft order put out about a year ago, Visa “stands to lose the most” from the changes, according to Barclays analyst Ramsey El-Assal. Visa has “substantial market share” in the market for U.S. debit cards, he noted.
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While El-Assal wasn’t sure how much market share Visa might lose as a result of the latest routing guidelines, he estimated that “a reasonable best-to-worst-case range to consider” would be a 1% to 3% net-revenue headwind for Visa.
If Visa were to give up market share, Mastercard Inc. /zigman2/quotes/207581792/composite MA -0.42% could absorb some of that share, he noted. Fiserv Inc. /zigman2/quotes/204817680/composite FISV -0.24% , which runs the alternative STAR network, and Fidelity National Information Services Inc. /zigman2/quotes/207166559/composite FIS +3.05% , which runs the NYCE network, also stand to gain.
“This would be similar to Visa’s PIN debit market-share loss following implementation of the original Durbin Amendment elimination of network exclusivity (though Visa was able to claw back significant share loss over time via pricing innovations),” El-Assal wrote.
Jefferies analyst Trevor Williams estimated that the rule could mean a roughly 3% negative earnings impact for Visa, though he thought Mastercard could see a negative earnings impact as well, of perhaps 2% on a per-share basis. The changes could mean “a 3% tailwind for FISV on STAR share gains,” he added in a note to clients.
Williams deemed the rule to be “less onerous than initially proposed,” which could help Visa and Mastercard limit share losses.
“Under the final rule, issuers must only ensure that each debit card can be processed on at least two unaffiliated networks—though two networks may ultimately not be available to a merchant if, for instance, one of the two networks enabled on the card is not accepted by the merchant (likely, given the smaller acceptance footprints for STAR, NYCE, Pulse, etc.),” he commented.
A Visa spokesperson didn’t respond to MarketWatch’s request for comment on the rule, while a Mastercard spokesperson declined to comment as the company was still reviewing the publication.
The latest update from the Fed seemed to sit well with merchants.
“This ruling is particularly important given the dramatic shift to e-commerce during the pandemic and the increased use of mobile apps and digital wallets for in-store purchases,” said Doug Kantor, an executive committee member at the Merchants Payments Coalition, in a release. “These transactions account for a rapidly increasing share of our nation’s economy and the Fed has closed a major loophole that allowed them to escape the competition intended by Congress.”
The Fed indicated in its Monday release that “many debit card issuers, and especially most community bank issuers, are already compliant with the final rule,” but the announcement still sparked pushback from the financial industry.
“Imposing this final rule would increase implementation and fraud costs for smaller financial institutions, on top of everything else they’re battling with inflation, all for the benefit of big-box stores and big online retailers such as Amazon,” said Dan Berger, the president of the National Association of Federally-Insured Credit Unions, in a statement to MarketWatch.
It’s been an eventful stretch in the world of card routing, as Sen. Dick Durbin, an Illinois Democrat, and Sen. Roger Marshall, a Kansas Republican, put out a release Monday saying they were seeking to attach their credit-card routing proposal as an amendment to the defense budget. The Durbin amendment brought about alternative-routing requirements in the debit market, and this latest legislation aims to apply similar rules to the credit landscape.
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Analysts generally saw a low likelihood of success for that initiative.
“Adding to the defense bill is tough as amendments that are not germane tend to be rejected,” Cowen & Co. analyst Jaret Seiberg wrote in a note to clients.
Seiberg added: “It is hard for us to see why leadership would want a big fight that could hurt political giving in a presidential election cycle.”