Why Visa & Mastercard Investors Shouldn't Sweat Fed's New Debit Routing Rule Change

On Friday, The U.S. Federal Reserve issued a press release highlighting proposed changes to debit card routing rules that analysts say could have an impact on Visa Inc V and Mastercard Inc MA.

What Happened? The proposed debit routing rules would require debit card issuers to enable their cards to allow merchants to choose from at least two unaffiliated networks to route transactions that occur online or without a physical card present. The new rule would supplement the existing 2011 Durbin Amendment regulations on debit card transactions.

The new rule proposal also comes after the Department of Justice launched a probe into Visa’s online debit transaction routing in March.

Related: How to Get a Debit Card

Why It’s Important: Bank of America analyst Jason Kupferberg said regulators are taking a closer look at online debit transactions because they are becoming an increasingly larger percentage of total debit sales.

Visa and Mastercard are the only two pure signature debit networks, and Kupferberg said roughly 50% of U.S. debit cards had not been enabled with PIN debit networks as of 2019. Therefore, if a card is enabled with Visa for signature debit and STAR for PIN debit, merchants effectively have no choice but to route transactions through Visa for card-not-present (CNP) transactions, Kupferberg said.

Bank of America estimates online debit transactions generated $2 billion in revenue for Visa in 2019, about 9% of the company’s total sales. Fortunately for Visa and Mastercard investors, Kupferberg said the negative impact of the proposed rule changes will likely be manageable.

“And even longer-term, given that the implementation of the Durbin Amendment 10 years ago (which represented a much bigger overhaul of the US debit market than what the Fed and DOJ are currently looking at) did not have any real discernible impact on V or MA’s numbers, we don’t believe this DOJ initiative will either,” Kupferberg wrote in a note.

Benzinga’s Take: Visa and Mastercard investors can take comfort in the fact that even if the new rules lead to greater competition in debit routing, the competition will be inherently limited due to the complexity and security requirements of routing debit transactions over PIN networks. Investors should continue to monitor the situation, but Bank of America remains bullish on both Mastercard and Visa.