Under the New Reform Amendment, a move that was spearheaded by Senator Dick Durbin, the Federal Reserve can already cap “swipe fees” imposed by retail debit cards to “reasonable and proportional.” This amendment would only be applicable to large banks and will not include credit card transactions, as it is for debit card transactions only. Because of this proposed law, Visa Inc (V.N) and Mastercard Inc (MA.N) shares have dropped significantly since Tuesday.

When the amendment gets approved and becomes a law, the repercussions on Visa Inc and MasterCard Inc include:

1. They will have limited power to set prices.

2. The debit card interchange fees will be regulated.

3. Credit card issuers might need to raise other fees to offset losses.

4. It may pave the way for credit card interchange fees to be scrutinized as well.

5. And according to Joe Saunders, Visa’s CEO, it could significantly affect transaction volumes.

Visa shares dropped 7.3% at $69.25 in the NY Stock Exchange, whilst MasterCard shares fell 6% at $198.07.  Since the announcement, Visa shares have declined a total of 18%, while MasterCard shares have dipped 13.6% as well.

Why is this happening?

Merchants are paying approximately $48 billion annually in interchange fees, or what is more popularly known as “swipe fees.” This is something that many retail establishments see as an unfair practice considering that consumers are being charged for debit transactions in their checking accounts. Since such transactions are debit, not credit, it should not be as high as it is. The amendment is good news for customers and establishments of course but this did not come as a welcome surprise to investors, which can be expected, apparently.

Visa and MasterCard Woes

According to Moshe Orenbuch, a Credit Suisse analyst, a 20% drop in these swipe fees could cause 2-4% drop in Visa and MasterCard revenues. And as Visa and MasterCard shares continue to drop, investors are slowly beginning to see the implications of the new law, although some of them do agree that such concerns are rather overrated.

Long Term Benefits

What most have failed to see is that there are benefits to this amendment and although such benefits have more to do with customers and retailers, this move does give consumers more buying capabilities what with better rates and discounts that retailers can already afford to give. This will undoubtedly entice people to use plastic more often, and in the long run, will be quite advantageous to credit card companies, Visa, MasterCard, and their investors due to increased buying opportunities.