Visa & MasterCard plunged more than 10 percent in the New York Stock Exchange yesterday and Could be Damaged

Visa Inc. and MasterCard could face permanent damage to the fastest growing part of its business after the Fed proposed rules that could reduce rates of debit card transactions by 84 percent.

"It's all negative," wrote Scott Valentin, an analyst at FBR Capital Markets in a note to clients. "This significant impact on the business model of networks."

Visa and MasterCard, the world's largest payment networks, plunged more than 10 percent in the New York Stock Exchange yesterday after the Fed suggested capping called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 percent of the purchase price, no matter the cost, and pass that money to banks that issue cards.

The change, if approved by the Federal Reserve after a public comment period, would eliminate most of the $ 16.2 billion in revenue generated debit cards last year to U.S. lenders, including Bank of America Corp, JPMorgan Chase & Co. and Wells Fargo & Co.

"These credit card giants and banks are imposing fees that do not relate to the actual cost of processing, and distributors and dealers have no way of negotiation or even resist these increases," the U.S. Sen. Richard Durbin, Illinois Democrat who pushed for the top, said in an interview. "This new law brings the Federal Reserve in the picture and changes the dynamic."

Visa fell 29 cents to $ 66.90 at 4:15 am in the market in New York Stock Exchange, after falling 13 percent yesterday, the highest in two years. MasterCard fell $ 2.23, or 1 percent, to $ 221.26, after falling 10 percent yesterday.

More competition

The exchange rate debit last year's average was 44 cents per transaction, or 1.14 percent of the purchase price, according to a draft of the proposed rules. Fed staff said the plans should provide for the exchange of 7 cents or 12 cents, a reduction of 73 percent to 84 percent. Initial Wall Street yesterday set the cut to 90 percent.

The proposed reductions to align U.S. exchange rates more closely with other countries, including Australia and 27 European Union nations. Visa Europe Ltd., operator of the continent's largest network payments, agreed to cut rates to 0.2 percent as part of an agreement to end the EU antitrust action, the European Commission said last week. MasterCard agreed to the same rate as last year.

Network options

The Fed has not yet decided how to implement a rule that would require banks to retailers to choose between at least two separate networks for debit transactions routing change could create more competition and San Francisco MasterCard, Visa .

MasterCard said the Fed did not take into account "the full range of costs" related to debit card programs and that the rules would change the costs of traders to their customers.

"Consumers do not, banks and payment networks are the biggest losers as a result of this regulation," said Noah Hanft, general counsel of Purchase, New York, MasterCard said in a statement. "This type of price control is wrong and contrary to competition."

Visa, which derives 20 percent of its revenue from debit cards in the U.S., said the rules are created "unintended consequences" for the industry and consumers.

Actual costs

"The Federal Reserve's proposal includes artificial caps on the exchange of debit not truly reflect the value of card acceptance and do not reflect the actual costs of managing a debit network secure, reliable and efficient," said Will Valentine A spokesman for Visa said in a statement.

While Visa and MasterCard do not keep exchange rates, the caps may prompt banks to renegotiate their contracts for services, payments networks largest source of income.

The covers are based on information obtained from issuers of debit cards, networks and dealers about the costs, the Fed staff wrote in a note that the Vice President, Janet Yellen, prepared for the meeting. This approach means that the Fed is unlikely to change much when writing the final rule, Jaret Seiberg, a policy analyst with MF Global financial services in Washington, said in a research note.

"Substantive changes will require new evidence, which is unlikely given the amount of work of the Federal Reserve has invested in this project," said Seiberg.

Retailers

The Retail Industry Leaders Association, which represents companies such as Wal-Mart Stores Inc., Home Depot Inc. and Target Corp., said the Fed's proposal validates the demands of the traders that the payments market is broken.

The Fed's proposal is a step forward in efforts to bring relief to traders and consumers, "said Brian Dodge, a spokesman for Rila.

Bankers push lawmakers to change or eliminate provisions Durbin passed in July as part of reform legislation Dodd-Frank financial, according to Kenneth Clayton, senior vice president and general counsel of the policy board of the American Bankers Association .

"Congress needs to revisit the issue," said Clayton. "A delay in the performance would be welcome."

To compensate for loss of profits, banks can eliminate the rewards debit and charge cards to some customers to use them, said John McDonald, an analyst at Sanford C. Bernstein & Co., in a Dec. 15 note to clients. Deposit account rates can go up and banks could promote other products that are not covered by the legislation, such as credit cards that require consumers to pay their bills in full each month, wrote.

Cards or cash

Debit cards have become an increasingly popular substitute for cash as credit card issuers cut bills and loans slowed amid the financial crisis and recession.

the U.S. consumer spending debit cards rose 8 percent last year to $ 1,450,000,000,000, while credit purchases fell 10 percent, according to the Nilson Report, an industry newsletter. The total debit transactions increased 13 percent to $ 38.6 million, while credit fell by 4 percent to 22.36 billion.

The law allows the central bank to consider the costs of fraud made by lenders to determine the appropriate rates of exchange. Fed staff said in its note that it lacked sufficient information to make a recommendation to the Council on this issue and seek input during the public comment period, which ends Feb. 22.

Fraud

"The biggest cost for most of our institutions in the provision of these services are the costs of fraud and fraud prevention costs," said Bill Cheney, chief executive of the Credit Union National Association.

While the law exempts banks with assets less than $ 10 billion, including most community banks and credit unions, institutions remain concerned that Visa and MasterCard can ultimately lower rates of exchange for all , said Cheney.

"Establishing a cap ensures that the issuer is able to receive an exchange rate at an excessively high," Yellen said in the memorandum outlining the proposals.