Citi analyst sees bigger risk for Visa than MasterCard in pending debit card regulations

Debit rules bigger risk for Visa than MasterCard

NEW YORK — Payment processors Visa Inc. and MasterCard Inc. face uncertainty as the Federal Reserve begins crafting the new rules for debit card fees called for in the financial reform legislation. But Visa has more debit risk than MasterCard because it dominates the U.S. market, a Citi analyst said Wednesday.

THE OPINION: The debit card provision is aimed at saving retailers billions of dollars in debit card fees, which merchants say results in inflated costs to consumers. Merchants typically pay between 1 and 2 percent of a debit card transaction to banks and credit card networks. The reform law will limit those fees.

The Fed is being “tight lipped” and is still in a fact-finding mode, wrote Citi analyst Donald Fandetti. Proposals are expected in November, with a 90-day comment period ahead of the formal deadline in April 2011. Fandetti said prevailing opinion is that the Fed has “limited flexibility” on setting the fees, although allowing for costs to handle fraud “are a swing factor.”

Fandetti said he expects signature debit will be included in the new rules, along with PIN-based transactions. “It is also possible that the November rules may be high level with few specifics, extending the uncertainty period,” he wrote.

The analyst thinks the final proposal will fall somewhere in between the worst-case scenario of a 60 percent to 80 percent reduction in debit revenue for banks and the market’s current expectation of a less harsh ruling.

“Sentiment for both stocks has become more cautious and we are seeing some (hedge funds) position negatively, though on a limited basis,” he said.

THE STOCKS: Visa shares shed $3, or 4.2 percent, to $68.50 by midday. Shares have moved between $66.54 and $97.19 in the past 52 weeks. MasterCard shares slipped $3.86, or nearly 2 percent, to $196.66. The stock has changed hands between $193 and $269.88 in the past 52 weeks.