Seven years ago, retailers in the U.S. sued both MA and Visa (NYSE:V), after the issuer of credit and debit cards under the VISA trademark, conspired to charge excessive fees to the retailers for the use of their cards by the consumer in a transaction. Retailers sought the right to impose fees, in turn, on consumers that would relieve the retailers of the high cost of the transaction fees imposed by the card issuers. Discover Financial Services Inc. (NYSE:DFS), issuers of the Discover Card, and American Express Company (NYSE:AXP), issuers of several types of cards under the "American Express" trademark, are not involved in the suit because those two companies permit retailers to impose fees on consumers using their cards if the retailer imposes the same fees on other transaction networks. MA and V have been involved in several settlement conferences with the plaintiff retailers this year, and they are expected to have approval of a settlement of the lawsuit with the retailers before the case is scheduled to go to trial in September of this year. MA and V have reached a settlement that is similar to the agreements reached by DFS and AXP, but the settlement is subject to approval by a federal court later this year.
Other regulatory fee changes on MA include the pressure to reduce "interchange fees" — which are imposed by banks on card transactions and part of which are also paid to MA — and so-called "Cross Border Fees," which MA collects on all international card transactions. U.S. banking regulators are pressuring MA and other card issuers to lower these fees as well, but MA is known to be deeply resistant to taking such an action. Virtually all market analysts seem to agree that MA's ability to resist regulatory pressure and keep the fee levels at or near their current levels is key to MA's desire to increase its revenue and value for both the short and long terms.
Last year, the United States Congress passed the Durbin Amendment to the Dodd-Frank Act. The Durbin Amendment, which affects only those debit card transactions which are authorized by a customer through the entry of a "PIN code" at the point of sale, also requires MA, V, DFS, AXP and others to cut the transaction fees on their debit cards by approximately half. Debit card fees are not an issue in the lawsuit currently pending against MA and V.
But everything is not bad news for MA. While the Durbin Amendment lowers debit card fees, it also requires banks with US$10 billion or more in assets to use separate networks for the authorization of credit card and debit card authorizations. MA already had such networks set up. Thus far during 2012, the transaction volume of MA's debit cards has grown to 20% of the market — more than triple its previous share — while it is believed that V's equivalent share has fallen to only about 9%. Market analysts have attributed this rise in MA's market share and loss in V's market share to MA's having debit and credit card authorization networks which are already in compliance with the Durbin Amendment. This volume is expected, at least in the short term, to increase even more for MA at the expense of V until V is able to bring its authorization networks more into compliance with the Durbin Amendment.
Furthermore, MA's expected growth in authorization fees looks good because, one, authorization volume, particularly on debit cards, is expected to continue to increase greatly as more and more consumers switch to debit cards for even smaller transactions, and two, MA is expected to actively resist regulators in lowering any and all proposed fee increases. Market watchers estimate that authorization fees represent over 22% of MA's stock value. Both DFS and AXP are expected to also enjoy increased revenue for this year as the credit card transaction market increases; AXP is the largest credit card issuer in terms of size of average transaction.
Consequently, the Aug. 1 quarterly earnings report is expected to be good news for shareholders with an expected increase in earnings and a strong indication that MA intends to remain firm in maintaining fee levels. In addition, a growing authorization market and MA's expected growth in market share in that very market also portend well for its stock value both now and in the longer term. The general consensus among market analysts is that MA will announce quarterly earnings per share of US$5.58, up from US$4.76 one year ago. I do, therefore, believe that keeping or increasing one's position in MA will prove profitable for the investor.