Visa Inc. was the S&P 500's biggest decliner Wednesday on fresh concerns about the revenue potential of the sector's leading players.
Analysts at Bank of America Merrill Lynch chopped their recommendation on Visa to underperform from neutral, signaling skepticism that the world's largest retail electronic payments network can maintain its pricing power and that new regulation could eat into margins derived from debit card fees.
In recent trading, Visa shares fell 4.1% to $68.59 in a session that saw advances in each of the major stock indexes.
Bank of America Merrill Lynch already held a pessimistic underperform rating for shares of Visa's chief rival, MasterCard Inc.
"We believe it will be difficult for the current balance of power in the payment system to be sustained longer term, with Visa generating 55% plus operating margins while issuers and merchants struggle to make money," said research analysts James Kissane, Georgios Mihalos and Karti Bhatt, in a note to clients.
A Visa spokesman declined to comment.
Bank of America Merrill Lynch's ratings cut runs counter to the dominant view among equities analysts. Most analysts retain bullish buy ratings on Visa. Bank of America Merrill's price target reduction to $70 from $87 is also notably bearish compared to most estimates.
Stocks have fallen sharply since Congress passed financial regulatory overhaul in May, but now is not an entry point, according to the research note.
"We believe that there is growing risk of a discontinuity in the growth and margin profile of the networks," it said.
The analysts said structural as well as regulatory risks will weigh on Visa's shares. Consolidation of card-issuing banks as well as merchant-side players leaves pricing power "considerably diminished," according to the note, which cites examples of issuer banks opting to underplay the visibility of Visa or MasterCard's brand.
Visa and MasterCard make money from the fees they charge banks, including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., to process card payments on the plastic these banks issue. These financial institutions are among the top issuers of Visa- and MasterCard-branded cards.
Visa also benefits from its larger market share in debit cards, which are used more frequently than credit cards for nondiscretionary expenses such as groceries or gasoline. Visa and MasterCard scored a victory in the sweeping financial overhaul because the definition in the new rules of what comprises an "interchange transaction fee" left network fees earned by the two untouched.
Still, the Bank of America Merrill downgrade outlined potential downward pressures stemming from financial regulatory overhaul, as issuing banks "look for pricing concessions from processors and networks to protect their bottom line." Potential regulation could also reduce fees derived from "swipe" fees from debit cards.
The new rules are aimed at curbing debit-card transaction fees earned by card-issuing banks. Visa and MasterCard have traditionally set these interchange rates for banks. The two don't receive interchange fees, but instead earn a fee for routing information from a merchant to the card-issuing bank.
However, the new rules could dent the exclusivity relationships carefully cultivated by Visa within the U.S. by requiring merchants to have at least two networks to choose from for every debit-card swipe.
"While it is too early to fully and accurately gauge the impact of the legislation, Visa has demonstrated an ability to manage our business through periods of change," said Joseph Saunders, Visa's chief executive, in July.
Seperately, Citigroup analyst Donald Fandetti said in a note to clients Wednesday that Visa is more at risk than MasterCard to lose profits as a result of card regulation, but that it is "too early to step in on the stocks."