Visa, MasterCard stocks plunge as Fed releases new rules to cut debit fees

Visa and MasterCard stocks plunged today as the Federal Reserve Bank released proposed rules to reduce debit-card interchange fees by 90 percent. The Fed has until Jul. 21 to implement new rules as outlined in the Dodd-Frank financial overhaul. 

Analysts say that these new rules, if implemented, will pose a serious threat to the profit margins of Visa and MasterCard.  Currently, U.S. debit accounts for about 20 percent of Visa’s revenues. 

Retailers, however, welcome the new rules, which would allow them to maximize their profits and to reduce prices for customers.  Many hope that the reduced fees will be closer to those in Europe.  As reported by Bloomberg, “A 75 percent cut in the interchange rate would put the U.S. on par with the 27 nations of the European Union.”  

The rules are in a comment period after which the Fed will vote on them. 

Read more about this major story at Bloomberg. 

Significant credit card changes proposed by the Federal Reserve

Published courtesy of LowCards.com.

Today, the Federal Reserve proposed a rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees, as well as requiring credit card issuers to reconsider increases in interest rates. This rule will go into effect on August 22, 2010.

"This proposal addresses two key costs of using a credit card--fees and interest rates," said Federal Reserve Governor Elizabeth A. Duke. "The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year."

The proposed rule would:

* Ban inactivity fees. Some issuers have recently instituted an inactivity fee if there are no transactions on your credit card for a certain period of time.

* Force issuers to evaluate rate increases. At least every six months, credit card issuers must reevaluate annual percentage rates increased on or after January 1, 2009. and, if appropriate based on their review, reduce the annual percentage rate applicable to the account. This includes changes in the consumer's creditworthiness, and to increases in the rate due to changes in market conditions or the issuer's cost of funds. However, the statute also expressly provides that no specific amount of reduction in the rate is required.

* Stop credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

* Require credit card issuers to provide reasons for increases in rates.

* Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of account terms.

Banks get another reason to stop lending

Banks now have another reason to stop lending: The Federal Reserve will pay banks a higher interest rate on their “excess reserves” or any money over their required minimum savings.    

The Fed enforces capital reserve requirements for its member banks and depository institutions to ensure that they can absorb a reasonable amount of loss. In other words, the Fed holds money for its members and pays interest on the amount that exceeds the minimum requirement.  After all, it is called the Federal Reserve Bank.  Currently, that interest rate is 0.25%.  The minimum amount of money required is determined by the capital ratio, a percentage of a bank's capital to its risk-weighted assets.

The calculation of this capital ratio has been a hot issue lately.  Many of the large banks that failed were tremendously overleveraged; put another way, they borrowed way too much money.  Based on testimony by an analyst at a recent FCIC (Financial Crisis Inquiry Commission) hearing, some banks were leveraged as high as 95 times.  A normal ratio is closer to 10 times and is much less risky.  Some congressional leaders and bankers believe that part of the solution to preventing another financial crisis is requiring that banks have higher reserve requirements.