US banks will see modest success from the deal to reduce swipe fees by Visa and Mastercard

Written by Manya Saini

(Reuters) – U.S. banks may see a modest hit to their profits due to a $30 billion settlement to limit credit and debit card fees for merchants through the Visa and MasterCard payment networks, Wall Street analysts said.

The antitrust settlement announced Tuesday is one of the largest in U.S. history. If approved by the court, it would resolve most of the claims in a nationwide lawsuit that began nearly two decades ago.

Withdrawal or interchange fees, paid by merchants, typically include a small flat fee plus a percentage of the total sale amounts, and average about 1.5% to 3.5% per transaction, according to Bankrate.com.

“On a pro forma basis, we estimate the impact to be approximately 1%-2% EPS before any mitigation efforts using retail card volumes, but interchange fees can vary significantly depending on the transaction,” JPMorgan said in a note.

the potential risks

Brokerage firm Evercore ISI said the move to lower and cap interchange fees affects issuing banks that generate revenue through fees and would not be financially significant to Visa and Mastercard.

“Removing anti-directive restrictions and by enabling competitive pricing, we could see merchants encouraging more cash transactions or cheaper debit transactions,” she said.

As part of the terms of the settlement, Visa and MasterCard agreed to reduce swipe rates by at least four basis points — 0.04 percentage point — for three years, and to guarantee an average rate that is seven basis points below the current average for five years.

Wall Street analysts expect banks to absorb much of the revenue loss by sharing the impact with the two card networks and cutting rewards expenses.

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Cards are among the most profitable and stable revenue sources for lenders, but most large banks do not disclose what they charge as interchange fees and the amount usually varies depending on the type of card.

“Small banks and credit unions may object to this deal or try to fight it. This is because it could give Walmart or another large retailer the ability to strike a deal with a huge bank for a credit card that provides a discount when used at checkout. This is because it could give Walmart or another large retailer the ability to strike a deal with a huge bank for a credit card that provides a discount when used at checkout,” TD Coin analysts said in a note.

The brokerage firm cited the settlement as a potential risk to Capital One's $35 billion deal for Discover Financial, which is expected to face tough antitrust scrutiny.

“The larger Capital One could try to use its card issuance feature to secure discounts to further expand its customer base,” she said.

(Reporting by Manya Saini in Bengaluru; Editing by Arun Kuyyur)

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