With so-called debit card swipe fees poised to take a severe hit, some payments analysts say a similar attack on credit interchange rates is inevitable.
The Federal Reserve Board last week released its long-awaited proposals for reducing debit interchange fees, suggesting a cap of 7 cents to 12 cents per transaction under two scenarios. The proposals, which are open for comment until Feb. 22, would reduce current rates by as much as 85%, according to some estimates.
"You're going to have a huge gap between debit and credit cards in the new world if this goes through," Chris Brendler, an analyst at Stifel, Nicolaus & Co. Inc., said during a conference call with investors on Monday.
Brendler downgraded the shares of American Express Co. on Monday, to "hold" from "buy," suggesting that the New York company would be most at risk if credit interchange rates come under regulation. American Express is both a payments network and credit card issuer, but it does not issue debit cards.
"We see [American Express] as heavily exposed given its high-cost model and lack of market power at the point of sale," Brendler wrote in a research note published Monday. "While it does have very loyal, valuable customers, we foresee an inevitable shift against Amex as merchants become increasingly focused on payments costs."
The downgrading sent the New York company's shares down 3.4% Monday, to $42.50. A spokeswoman for American Express declined to comment on the report.
Speculation that credit interchange rates would become a target for regulation has been rampant since Sen. Richard Durbin, D-Ill., introduced an amendment to the Dodd-Frank bill this year instructing the Fed to set debit interchange rates that are "reasonable and proportional" to card issuers' costs.
"It does leave you with kind of an inconsistency around how debit interchange is determined and regulated versus how credit interchange works," Bryan Derman, a partner in the payments consulting firm Glenbrook Partners in Menlo Park, Calif., said in an interview. However, he said, immediate legislation addressing credit interchange is unlikely.
"There's sort of no one talking about it at the moment, and the makeup of the Congress would seem to make it less likely to get through," Derman said. "You don't have a massive financial reform bill pending that you can tuck it into." A spokesman for Durbin did not respond to inquiries about whether the senator has plans for a credit interchange bill.
In a separate report Monday, Brendler said he expects Congress to address credit interchange within three years, "if not much sooner."
Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a lobbying group that represents payments networks and issuers, said in an e-mail that the current debit interchange proposals are "sloppy."
"I would imagine the next Congress will spend a lot more time trying to fix what went wrong rather than adding even more pain for consumers, small financial institutions and our economic recovery," Wexler wrote.
