US banks brace for modest impact from Visa, Mastercard swipe fee deal

A $30 billion settlement aiming to curtail credit and debit card fees for merchants by payment giants Visa and Mastercard could slightly dent the earnings of US banks, as highlighted by Wall Street analysts.

The antitrust settlement, unveiled on Tuesday, stands as one of the largest in US history and seeks to resolve longstanding nationwide litigation initiated nearly two decades ago.

Swipe or interchange fees, which merchants pay, typically consist of small fixed fees plus a percentage of total sale amounts, averaging between 1.5 per cent to 3.5 per cent per transaction, according to Bankrate.com.

Preliminary assessments from J.P. Morgan suggest that the impact on earnings per share (EPS) could hover around 1 per cent to 2 per cent before any mitigation efforts, relying on retail card volumes. However, analysts caution that interchange fees can vary significantly by transaction.

While the reduction and capping of interchange fees primarily affect issuing banks that rely on these charges for revenue, Visa and Mastercard themselves are not expected to face significant financial repercussions, according to brokerage Evercore ISI.

As part of the settlement terms, Visa and Mastercard have committed to slashing swipe rates by at least four basis points for three years, with an average rate set to remain seven basis points below the current average for five years.

Analysts predict that banks may offset the revenue loss by distributing the impact between card networks and cutting back on reward expenses. However, the specific impact remains uncertain, as most large banks do not disclose interchange fees, and rates can fluctuate based on card type.

Notably, smaller banks and credit unions may contest the deal or seek to challenge it, fearing that it could grant major retailers leverage to negotiate discounts with larger banks for credit cards. This development could potentially disrupt deals such as Capital One's $35 billion acquisition of Discover Financial, which faces stringent antitrust scrutiny.

(With Reuters inputs)