MasterCard (MA) Faces Penalty Over High Interchange Fees

According to certain sources, credit card company MasterCard Incorporated (NYSE:MA) has once again been slapped with a fine of $18.72 billion related to the overcharging of interchange fees to consumers in the UK.

These charges follow a 2014 ruling by the Luxembourg-based European Court of Justice which upheld a 2007 European Commission decision on MasterCard's multilateral interchange fees on cross-border transactions. It was ruled that MasterCard had breached competition rules through the 1992–2007 period.

The company was already under EU scrutiny for charging exorbitant interchange fees on transactions made through MasterCard’s cards. The interchange or cross-border card fees were booked by the card-issuing bank and charged to merchants. EU policymakers consider this to be an unfair cost that unnecessarily inflated card pricing for retailers and consumers. These costs also encourage unhealthy competition between card players, according to legislators.

Recent Reversal of Litigation Charges

MasterCard is now facing uncertainty with regard to the interchange settlement reached in 2010, which was rejected this June by the federal appeals court. In late 2010, the company, along with other card companies like Visa Inc. (NYSE:V) , settled an antitrust suit for approximately $7 billion with the U.S. Department of Justice. The regulatory body accused these companies of impeding merchants from promoting the use of competing credit or charge cards with lower acceptance fees. Rejection of the deal increases the possibility of renegotiations

Impact of Past Litigations

As a globally operating organization, MasterCard has been subject to increasing global regulatory focus in the payments industry. Due to increased public scrutiny, the company has been embroiled in several state and federal lawsuits related to the violation of interchange rates, currency conversion practices and pricing structure.

MasterCard had also incurred a sizeable litigation pre-tax charge of $770 million in fourth-quarter 2011, which impacted margins significantly. The company settled this multi-state merchant class litigation by incurring another $20 million in second-quarter 2012. The company also recorded a provision of litigation settlement charge of $20 million in second-quarter 2012, while another $95 million was incurred in fourth-quarter 2013.

Bottom Line

Growing supervision on card policy and fee structure has prompted MasterCard and other card networks to direct their resources toward digital payment products through e-commerce and m-commerce. MasterCard also launched its next-generation compact digital wallet – MasterPass – in Feb 2013 in order to utilize the latest technology and meet market demand through a wide, consumer-friendly and secure fund transfer platform via near field communication (NFC)-enabled mobile devices.

We believe that such long-term growth strategies are crucial for withstanding competitive pressures and realizing management’s expectation of positive earnings growth.

Currently, MasterCard has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same sector include JetPay Corporation (NASDAQ:JTPY) and SLM Corporation (NASDAQ:SLM) . Both the stocks carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>