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Market Update

Federal Reserve Backs Off on Interchange Fees, But Our Visa, MasterCard Fair Values Unchanged

This positive announcement does not change our current fair value estimates for the firms.

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After much discussion and debate, the Federal Reserve announced a surprising retreat from the $0.12 interchange fee limit proposed late last year. The latest staff recommendation now calls for a $0.21 cap per debit card transaction, in addition to a 0.05% "ad valorem" component and an additional $0.01 fee related to fraud prevention.

The newest recommendation is still a major decrease from current fees, but much less harsh than the initial $0.12 proposal. We always have believed the impact of the Durbin Amendment limitations on Visa (V) would be manageable and the effect on MasterCard (MA) would be minimal, so this positive announcement does not change our current fair value estimates for the firms. However, it does illustrate the difficulties of predicting the behavior of politicians and regulators--the reason why we recently increased our uncertainty ratings for these companies. Once the interchange rules are finalized, we plan to revisit our uncertainty ratings for the payment networks.

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Michael Kon does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.