In what is possibly one of the largest anti-trust cases, Visa (V), MasterCard (MA), credit card issuing banks and retailers reached a settlement worth $7.25 billion, which is subject to approval of the judge. The deal involves payment of $6 billion from credit card issuers to merchants and reducing some of the fees to save merchants another $1.25 billion for the next 8 months. This is a big event with many implications for credit card issuers, retailers and consumers.
Currently, when someone uses a credit card to purchase an item or a service, credit card issuers deduct a fee from the total sales number in order to process the payment. This fee eats into profit margin of merchants, something they are not too happy about. Visa and MasterCard don't allow merchants to charge extra fees for using their cards. Merchants have been trying to find a way to pass some of the processing fees to customers in an effort to discourage them from using credit cards for payments. For example, some gas stations offer discounts to customers that pay their balance with cash. With this new settlement, passing the swiping fees to customers using credit cards may actually materialize. According to the settlement, the merchants will have to disclose the rate of swiping fees and these fees will be capped at a certain rate. The swipe fees currently paid by merchants to credit card issues exceed $50 billion annually.
Banks such as JP Morgan (JPM), Wells Fargo (WFC) and Bank of America (BAC) were also part of the deal and they will have to pay part of the sum. Visa will pay the largest chunk of the settlement fee as the company will pay more than $4 billion for the case. The company has already set aside $4.4 billion for the case and it will be able to cover its part of the settlement. According to an agreement between Visa and MasterCard last year, Visa will take on twice as much of the damage as MasterCard will. In addition, the banks mentioned above will jointly pay nearly half of MasterCard's settlement fee.
If merchants start charging customers extra fees for using credit cards, they may lose a lot of costumers - for example me - and see decline in revenue. Merchants will have to find a balance between increasing their profit margins and keeping their revenue growth steady. If all merchants charge clients extra for using credit cards, this may not backfire, however, if some merchants end up charging clients extra and others don't, the clients will probably have a preference for those that do not. I really don't think many merchants will end up surcharging their clients, given the weak status of economic and price sensitivity of clients. These days, customers have so many alternatives that it is very easy to get merchandise or services from another company if one isn't happy with the company that he or she has been using.
The extra charges, if implemented, will be limited to what merchants pay to credit card issuers, and this number usually ranges from 1.5% to 3.0%. Debit cards, in addition to the credit cards issued by American Express (AXP) and Discover will not be part of this settlement; however, merchants might file additional lawsuits in an effort to bring similar outcomes for those cards too. In addition, there are 10 states that will not allow merchants to charge their clients extra for using credit cards, namely: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.
Earlier, the U.S. Department of Justice targeted Visa and MasterCard for their practice of keeping merchants from rewarding clients for using cheaper methods of payments. At the end, the two companies reached a settlement with the Department of Justice; however the policies were not changed. In this case, the policies will change too.
The settlement is bullish for Visa and MasterCard. The price tag could have been much higher. Both the companies have enough resources to pay off the settlement fee as they were already prepared for this. Moving forward, Visa is expected to earn $6.06 this year, $7.10 the next year and $8.21 the year after. Given the current stock price of $126, the company is looking at forward P/E ratios of 20, 17 and 15 respectively. MasterCard is expected to earn $22.06, $26.16 and $30.34 in the next 3 fiscal years. The company's current stock price is $437 and it is looking at forward P/E ratios of 19, 16 and 14 respectively. This is after a number of analysts reduced their earnings estimates for the two companies due to the slowing economy. The two companies are increasing their global exposure in order to offset effects of a slowing economy, and both companies are expected to see strong growth for the foreseeable future.
Having exposure to either of these companies is a great way of getting exposure to the global economy without having to diversify one's portfolio with hundreds of different stocks. Visa and MasterCard earn money from such a large variety of industries in such a large number of countries that it would take a major economic catastrophe to take either of these companies down.