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Stifel cuts American Express: Witness the Death of Signature Debit

What the hell is wrong with analysts today.  The venerable Stifel Nicolaus (yes, I am being sarcastic) downgraded AXP from buy to hold today because of the significantly reduced interchange fees on debit cards.  While the interchange issue wasn’t the only reason for his downgrade, it definitely appears to be the catalyst behind his decision.  His reasoning appears to be that while AXP doesn’t issue debit cards, it will nonetheless be negatively impacted by the severe reduction in interchange fees that has been proposed by the Fed because merchants will now be incentivized to steer customers away from higher priced cards like American Express cards and into the newly lower cost debit cards.  Well, let me clue you in on something Mr. Chris Brendler (the Stifel analyst who wrote the report), MOST AMERICAN EXPRESS CARD USERS DO NOT USE DEBIT CARDS!  This is a total different customer base.  Not only do debit card users tend to be on the opposite end of the economic spectrum from American Express card users but American Express card users tend to use their cards for the rewards.  American Express card users tend to be much more affluent while debit card users tend to be those with weaker credit backgrounds.  In addition, most of American Express’ card users pay in full each month so why would they even bother with a debit card, which is an immediate debit, when they get the float offered by the American Express card (as well as other credit cards).   So:

1) if a retailer offered me an average savings of $0.32 ($0.44 average interchange fee in 2009 less the new $0.12 proposed cap from the Fed) my response would be that I do not use a debit card because  do not like them as the liability protections are much weaker on them and there is a direct link to my bank account which provides me no float and reduces the level of security in the event the card is lost or stolen.  My next response would be “don’t try to tell me which card to use because I want the rewards on my American Express and I don’t care about the $0.32 savings.

2) do you really think that the retailer will pass on the savings to the consumer.  N-F-W.  That retailer, who, by the way, has been bitching about the high interchange fees will be pocketing any difference that the Fed gives him.

3) so, since consumers will not see any savings from the reduction in interchange fees they will not change their behavior at the point of sale.

4) in addition, if the new fees are actually ratified, which is very far from certain, I predict the death of signature debit cards.  Here’s why.  Banks, whose interchange fees will have been cut, must find other ways to replace that lost revenue.  They will do so by increasing other fees on those consumers who use debit cards.  Once consumers realize that they are the ones that are paying for the Fed’s interchange fee reduction, they will realize that using a signature debit card is a losing proposition and go back to plain old charge/credit cards like those from American Express or maybe even those Green Dot prepaid cards if they don’t have access to credit.  As signature debit usage declines, banks will de-emphasize this product and move on to the next big thing.

5) so, it a very indirect and circuitous way, the reduction in interchange fees could actually help American Express’ business.

While Chris Brendler may or may not be correct on his view that there is risk that Congress comes after the credit interchange, that is not currently on the table and may not ever be on the table once the true effects of the debit interchange are revealed, his view on the direct impacts to American Express from the interchange fee reduction is far from accurate.


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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.