Visa Inc. (V) and Mastercard Incorporated (MA) recently made headlines with a settlement estimated at $30 billion, marking a significant development in the U.S. retail and banking sectors. This antitrust settlement, one of the most significant in U.S. history, addresses long-standing disputes over credit and debit card fees stemming from a nationwide litigation that started in 2005.
V and MA have consented to various alterations in the short run as a component of the resolution. They agree that companies could decrease interchange rates - the charge merchants must pay for managing a credit card payment, also called “swipe rates” - by a minimum of 4 basis points (0.04 percent units) for three years. Swipe rates need to be seven basis points less than the average during the next five years.
In addition, it will become easier for merchants to guide customers toward other payment methods, and they can apply extra costs to premium credit cards with higher swipe fees. The settlement is still under the court’s endorsement and won't take effect until late 2024 or 2025.
Anticipated Impact on Merchants and Consumers
Patrick Payne, an assistant professor in personal and family financial planning at the University of Arizona in Tucson, does not expect “dramatic changes” from this agreement but thinks it might make premium cards more costly.
The cards are already costly. For example, the Chase Sapphire Reserve requires an annual fee of $550, but it offers benefits such as access to airport lounge membership and a $300 yearly travel credit. The annual fee for the American Express Platinum Card is almost $700.
Premium cards are more expensive for merchants, too. According to the National Retail Federation, swipe fees typically range around 2% per transaction but can go up as high as 4% for premium rewards cards. If the settlement gets approved, merchants will have the right to charge their customers extra when using premium Visa and Mastercard credit cards.
However, it's not certain whether stores will agree to increase the costs for these customers. Demanding an additional surcharge from specific customers, especially those who pay a lot, might harm relationships and business.
Now, what does it imply for the consumers, the ones who are actually swiping their cards? Probably not a lot, according to experts. “We’ll need to wait and see,” stated Ted Rossman, a senior industry analyst at Bankrate. “My honest assessment is that I don’t think this is a big deal for any party involved,” he said.
Rossman said the settlement’s impact is not much because it lowers swipe fees by less than 1% for a few years and caps the rates for five years. “That’s such a minimal change that I don’t think it’s going to make a big impact,” he remarked.
That said, critics argue that even though this new rule might control market powers, it does not necessarily solve issues related to dominance and setting fees.
Beverly Harzog, the writer of “The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free,” shared that she doesn't think there will be much alteration among credit card issuers following the agreement. This is partly due to alterations not being a “permanent fix.”
She mentioned how three- and five-year spans allow very little time for these firms to implement substantial changes.
Additionally, Rossman adds that the settlement is “a flash point in a larger war,” maybe the most crucial fight yet is about the Credit Card Competition Act. Democratic Senator Dick Durbin from Illinois suggested this law, and it might bring in more competition to this area.
Rossman believes that if Durbin’s bill becomes law, it would significantly affect the financial sector more than the recent settlement. He also mentions how improbable it is for this bill to be approved at the present time. “That's the type of thing that could really change credit cards,” he added.
Bottom Line
Visa and Mastercard are notable players in the consumer financial industry. They are primarily known for their dominance in high-margin businesses, characterized by a consistent increase in revenue and profit fueled by consumer spending. This aspect has garnered significant popularity among investors, as both V and MA stocks have delivered impressive returns over the years.
V and MA have not provided specific details on how the recent settlement could impact their performance in the coming years. Investors may have to wait for their next quarterly reports to gain more insight.
While both companies are financially strong enough to handle the effects of the settlement, the potential savings of $30 billion for merchants over five years translate to a significant annual impact of $3 billion for each firm. This could have substantial implications, potentially resetting revenue levels lower than their current status and leading to slower growth rates.
Besides interchange fees as the primary income source, V and MA earn money from other places, such as small-business solutions. However, most of their revenue still comes from interchange fees.
Despite these potential challenges, the fundamental business model of Visa and Mastercard remains unchanged. However, the settlement’s financial impact underscores the need for investors to closely monitor developments and assess how they could influence the companies’ financial performance and growth trajectory moving forward.
Additionally, regardless of the settlement’s unknowns, V and MA shares still trade at premiums over their peers. For instance, V’s forward non-GAAP P/E of 28.08x is 162% higher than the industry average of 10.54x. Also, its forward EV/Sales and EV/EBITDA multiples of 15.70 and 22.23 compared to respective industry averages of 3.02 and 10.52.
Likewise, MA’s forward non-GAAP P/E of 33.24x is 215.4% higher than the industry average by 10.54x. Additionally, the stock’s forward EV/sales and EV/EBITDA multiples of 16.12 and 26.24 unfavorably compared to the industry averages of 3.02 and 10.52, respectively.
Moreover, both V and MA exhibit notable volatility, with V boasting a 60-month beta of 0.96 and MA standing at 1.08. Considering these factors, investors may benefit from waiting for further clarity on the settlement's repercussions before scooping up shares of V and MA.
