Kevin Grewal: The Durbin Amendment seeks to reduce credit and debit card networks from imposing anti-competitive restrictions and high transaction fees on small businesses, merchants and government agencies and could provide positive support for some large-cap and regional banks.
More specifically, the Durbin Amendment is aiming at preventing both MasterCard (NYSE:MA) and Visa (NYSE:V), who constitute roughly 80 percent of all credit and debit card transactions, from continuing to increase debit card interchange fee rates. To regulate the fee structure, the amendment would direct the Federal Reserve to issue regulations to ensure that interchange fees imposed are “reasonable and proportional” to the cost incurred in processing the transaction.
Initially, under the Amendment, the Fed proposed a haircut on signature and online debit interchange fees bringing them down to 12 cents per transaction, which cut into earnings for some banks by as much as 10%. Many analysts and experts predict that when the final ruling of the Amendment is complete, this interchange fee cap will likely be significantly higher than 12 cents, but below the rates before the initial proposal, likely resulting in a jump in earnings for some banks.
As for the electronic payments network giants, Visa and MasterCard, the final version of the Amendment is expected to not require signature exclusivity which will likely open up competition for both companies and contribute to an increase in overall earnings.
From an investor’s standpoint, some equities that could be impacted by the Durbin Amendment include:
- First Trust US IPO Index (NYSE:FPX), which boasts Visa as its second largest holding at nearly 9.15% of assets.
- SPDR KBW Bank ETF (NYSE:KBE), which is a diversified play on the banking sector and includes Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), US Bancorp (NYSE:USB) and Fifth Third Bancorp (NYSE:FITB) in its top holdings. All of these banks derive a significant portion of their revenues from the aforementioned transaction fees.
- iShares Dow Jones US Financial Sector (NYSE:IYF), which boasts some of the previously mentioned large-cap banks as well as Visa in its top holdings.
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.