FBR Capital: Final Durbin Interchange Rule This Week; Expect Volatility in Card Networks
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Rating Summary:
45 Buy, 6 Hold, 1 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
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FBR Capital on Financial Institutions: Financial Policy - Final Durbin Interchange Rule This Week; Expect Volatility in Card Networks
FBR analyst said, "The Federal Reserve is expected to issue its final rule on debit interchange regulation (the Durbin Amendment) on June 29 at 3:10 p.m. EDT, with a board meeting scheduled for 3:30 p.m. We continue to expect the final rule to include an interchange fee cap range of $0.12–$0.20 and the Fed's selection of alternative "A" regarding network exclusivity. Following the defeat of the Tester Amendment on June 8, Visa (NYSE: V)(Outperform) and MasterCard (NYSE: MA)(Outperform) have performed as expected (down 7.4% and 0.96%, respectively), given Visa's greater exposure to debit-related revenue. While we continue to expect the Fed to select alternative "A," we think Visa is most susceptible to further underperformance if the Fed selects alternative "B." We expect the Fed to select alternative "A" based on (1) the FDIC's public support by Chairman Bair, (2) the onerous cost for small banks (<$10B in assets) to issue cards with two signature networks, (3) Senator Durbin's staff signaling the acceptability of alternative "A," (4) network exclusivity not being a top issue for merchants, and (5) the relatively short lead time to make necessary technological/infrastructure changes by the July 21, 2011, implementation date. While we remain confident in Visa's success over the long term (given the global secular transition of payments
from cash/check to plastic/electronic), should the Fed surprise and select alternative "B," we would expect V shares to react negatively."
FBR analyst said, "The Federal Reserve is expected to issue its final rule on debit interchange regulation (the Durbin Amendment) on June 29 at 3:10 p.m. EDT, with a board meeting scheduled for 3:30 p.m. We continue to expect the final rule to include an interchange fee cap range of $0.12–$0.20 and the Fed's selection of alternative "A" regarding network exclusivity. Following the defeat of the Tester Amendment on June 8, Visa (NYSE: V)(Outperform) and MasterCard (NYSE: MA)(Outperform) have performed as expected (down 7.4% and 0.96%, respectively), given Visa's greater exposure to debit-related revenue. While we continue to expect the Fed to select alternative "A," we think Visa is most susceptible to further underperformance if the Fed selects alternative "B." We expect the Fed to select alternative "A" based on (1) the FDIC's public support by Chairman Bair, (2) the onerous cost for small banks (<$10B in assets) to issue cards with two signature networks, (3) Senator Durbin's staff signaling the acceptability of alternative "A," (4) network exclusivity not being a top issue for merchants, and (5) the relatively short lead time to make necessary technological/infrastructure changes by the July 21, 2011, implementation date. While we remain confident in Visa's success over the long term (given the global secular transition of payments
from cash/check to plastic/electronic), should the Fed surprise and select alternative "B," we would expect V shares to react negatively."
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