When I opened the computer on Friday and saw the drop in price, my first thought was “what happened again?” and that “I might have jumped in too early” when I bought Visa (V) the previous day. But then I stopped panicking and started thinking again. What caused the major defeat of Visa along with Master Card (MA) and other financials? It’s our comrades in Senate whose philosophy is to help you even if you do not want any help and protect you against yourself. Maybe next time, whenever any of us refuse governmental help, the comrades may start using force and arresting us for not accepting such a generous (even unwanted) help.

Well, I sold Visa today to protect my money. I wasn’t willing to hold on losing trade. Maybe it was wrong approach because the stock may start growing again. Maybe.

Right now It seems like it will be driven further south, mostly by totally uninformed investors. Wall Street seems have no clue how Visa is making money and this is why investors start panicking whenever any news about credit cards come out. Earlier, about two years ago, I wrote about an analyst who recommended selling Visa, because it was exposed to credit card delinquencies. What a nonsense!

Today Visa is once again driven down by a crowd who is clueless how this company makes money.

You may already know that whenever you use your Visa credit or debit card your merchant pays 1% to 3% fee, called interchange fee. Most likely the merchant passes the fee onto a consumer, but large retailers may not. However that is not the point. A general public THINKS that this is the fee which goes to Visa (or Master Card). But that’s incorrect. Visa doesn’t receive a penny from this fee.

Who gets the fee then if it’s not Visa? I have read several conclusions these days stating that the cap approved by Congress may affect Visa revenue. Well, if Visa is not a receiver of the money, it won’t affect them at all!
I can see the confusion here. I read on CNN Money the following:

“Industry kingpins Visa and MasterCard collected interchange fees of at least $35 billion in 2007, according to government estimates.”

Everybody automatically assumes, Visa and Mastercard got so fat on this. Maybe this is why Dick Durbin got so jealous and decided to act and push the bill to protect his incompetent voters. In former Eastern post-communist countries you may find many such Durbins.

So what’s the deal with Visa and interchange fees? Visa collects those fees, but reimburses them back to the card issuing banks. Visa doesn’t keep a penny. When you take a look at annual report on Visa’s web, you will clearly read:

“Although we administer the collection and remittance of interchange reimbursement fees through the settlement process, we generally do not receive any portion of the interchange reimbursement fees.”

It seems, that investors didn’t do their homework when investing into Visa. All the mess around this stock is a pure overreaction and there was no need for such a sell off.

OK, so how is Visa making money? They charge processing fees and service fees based on transaction volumes and these are fully paid by issuing banks. Of course, banks will pass those fees down to their clients (in this chain the retailers), and they pass it on you, but the cap most likely won’t affect Visa at all, because banks will most likely reduce their own fees charged on top of the Visa’s ones.

I could find (unfortunately too late) that Visa anticipated something like this and on their web site they published the following:

If we cannot successfully defend our ability to set default interchange rates to maximize system volume, our payments system may become unattractive to issuers and/or acquirers. This could reduce the number of financial institutions willing to participate in our open-loop multi-party payments system, lower overall transaction volumes and/or make closed-loop payments systems or other forms of payment more attractive. Issuers could also begin to charge higher fees to consumers, thereby making our card programs less desirable and reducing our transaction volumes and profitability. Acquirers could elect to charge higher merchant discount rates to merchants, regardless of the level of Visa interchange, leading merchants not to accept cards for payment or to steer Visa cardholders to alternate payment systems. In addition, issuers or acquirers could attempt to decrease the expense of their card programs by seeking incentives from us or a reduction in the fees that we charge.

So will this hurt Visa or Master Card? Potentially this may have some impact on these companies. As Visa states, it may happen by “steering consumers to alternative payment methods”. But, what are those methods besides cash or writing checks? Will you be using checks or cash rather than your debit or credit card? I personally do not carry checks or cash at all and use my debit card. It will be banks who will most likely absorb this loss rather than Visa, but they won’t quit using Visa or Master Card network.

Even though Durbin’s amendment passage is really unfortunate, and stupid socialistic way of governmental interference with free market and part of the game and its risk, I was also forced to sell the stock and wait until the Wall Street realizes that they overreacted this too much and the stock starts recovering. Originally I believed the recovery would come today (Monday 17th), but it didn’t happen and the stock displayed another strong selling pressure. The stock corrected ca 23% so far, some say it will go even lower all the way down to $40 – $60 range. Let’s see what will happen in a few upcoming weeks.

Nevertheless, Visa is creating a great buying opportunity. It’s internal fair value is at $100 per share so the stock still has great potential for recovery and growth. This huge drop will allow buying the stock very cheap.