Europe Regulation May Be in the Cards

From: Barron’s

There are expectations for action on debit and credit transactions.

Morgan Keegan

There are increasing expectations of a near-term regulatory action from the European Commission concerning Visa Europe Interchange rates for both debit and credit transactions.

This is a topic that has been brewing for some time, with the European Commission scrutinizing interchange rates on numerous occasions over the past 10 years. While the most recent comments from JoaquĂ­n Almunia (the European Commissioner responsible for competition) have only referred to Visa Europe, previous comments from the Commissioner indicate that both Visa Europe and MasterCard (ticker: MA) activities are likely under review.

Both card networks have informally settled with the European Commission in the past, which has helped interchange rates avoid EU-wide regulation to date. Specifically, Visa Europe has lowered cross-border consumer debit-card transactions and domestic transactions with these cards (in nine EU Member States) to 20 basis points; MasterCard has reduced its cross-border interchange rates for debit and credit to 20 basis points and 30 basis points, respectively.

Therefore, to date, domestic interchange rates for credit or debit in most EU countries remain unregulated—these domestic fees appear to be the focus of recent European Commission scrutiny.

Impact to Visa: Visa Europe is a separate entity from Visa (V), so any regulatory action would have a small impact on Visa (potentially impacting cross-border volumes).

Impact to MasterCard: We believe that MasterCard’s volume, revenue, and earnings exposure to European Credit Interchange regulation would be comparable to that of Visa’s exposure to U.S. debit interchange regulation (the Durbin amendment); therefore, future discussions, Commission comments and announcements could potentially be a major overhang for the stock.

At this time we have no specific data on what regulatory actions may be taken, but given the risks we continue to prefer Visa (rated at Outperform-Market Risk) shares over those of MasterCard (rated at Outperform-Speculative).

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