by Charles Sizemore | August 23, 2011 11:56 am
Wells Fargo (NYSE:WFC) made news this week by scrapping its debit card reward program. Beginning in October, customers will no longer earn points for using their debit cards. Wells’ decision followed similar moves by JPMorgan Chase (NYSE:JPM) and Sun Trust (NYSE:STI) to eliminate their own reward programs.
It appears that after the Fed’s decision to cut the fees that banks can charge retailers, the existing debit card model is no longer profitable. Banks can now charge no more than 21 cents for each transaction; previously the average fee had been 44 cents. Having seen their fees sliced in half, banks are having to slash expenses and look elsewhere for revenue. Wells Fargo and Chase are experimenting with something that hasn’t been seen in a long time: actually charging customers a monthly fee for debit card use.
Though it is hard to get customers to pay when they have become accustomed to getting something for free (witness the continued struggles of paid music download sites), I suspect the banks will be surprised by how willing some of their customers are to pay. Once accustomed to the convenience of paying with plastic, few customers will want to go back to the Dark Ages of lugging around cash or a checkbook (do stores even accept checks anymore? Has anyone actually tried lately?). A nominal monthly fee of $2-$3 for the use of a debit card is an irritant, but it is still better than the alternative of no debit card at all. Ultimately, competitive forces will probably force banks to keep any fees to a minimum, and they will have to find other ways to cut costs and extract revenues.
In any event, Visa (NYSE:V) investors appear to be shrugging off any lingering concerns about the fee cap on the company’s prospects. Visa shares have weathered the storm of the past month comparatively well, losing considerably less than the S&P 500 in a market gripped by macro fears.
When this current spate of volatility subsides, I expect Visa to continue its ascent. As I’ve repeated in past articles, Visa’s continued growth is supported by two durable macro trends:
The growth in electronic payments is a durable macro trend that is unlikely to be broken, even by forces as incompetent as the U.S. Congress and the Federal Reserve. The current volatility in the stock market may have already ended –or not. Only time will tell. But in any event, Visa at current prices would seem to be an attractive investment for the next several years. I reiterate my buy recommendation.
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Charles Lewis Sizemore, CFA, is editor of the Sizemore Investment Letter. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.”
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