Some Analysts Say Credit Card Rate Reforms Might Be Next

With so-called debit card fees poised to take a severe hit, some payments analysts say a similar attack on credit card interchange rates is inevitable.

The Federal Reserve Board last week released its long-awaited proposal for lowering debit card interchange rates, suggesting a cap of 7 cents to 12 cents per transaction under two scenarios (see story). The proposed rates, which are open for comment until Feb. 22, represent a reduction of as much as 85% from current rates, according to some estimates (see proposal).

“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 with Stifel, Nicolaus & Co. Inc., said during a conference call with investors on Monday.

Brendler downgraded shares of American Express Co. on Monday to “hold” from “buy,” suggesting that the New York-based company would be most at risk if credit interchange rates come under regulation. AmEx is both the acquirer and issuer of its credit cards, and it negotiates rates directly with merchants. 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 Dec. 20. “While it does have very loyal, valuable customers, we foresee an inevitable shift against AmEx as merchants become increasingly focused on payments costs.”

The downgrade sent the price of AmEx’s stock down 3.4% Dec. 20 to $42.50 per share. A spokesperson for AmEx declined to comment on the report.

Speculation that credit interchange rates are a target for regulation has been rampant since Sen. Richard Durbin, D-Ill., introduced an amendment to the Dodd-Frank Act earlier 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 with payments consulting firm Glenbrook Partners in Menlo Park, Calif., said in an interview.

However, Derman believes it is unlikely that there will be immediate legislation addressing credit card interchange.

“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 says. “You don’t have a massive financial-reform bill pending that you can tuck it into.”

A spokesperson for Durbin did not respond to inquiries about whether the senator has plans to introduce credit card interchange legislation.

In a separate report Monday, Brendler said he expects Congress to address credit card interchange within three years “if not much sooner.”

A spokesperson for the Electronic Payments Coalition, a lobbying group that represents payments networks and issuers, said in an e-mail that the Fed’s debit card interchange proposals are “sloppy.”

“I would imagine the next Congress will spend a lot more time trying to fix what went wrong rather than add even more pain for consumers, small financial institutions and our economic recovery,” she wrote.

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