In a recent note to investors, Sterne Agee analyst Thomas McCrohan and Leonard De Prospo said the Supreme Court listened to oral arguments regarding several petitions related to the case on a private meeting last Friday.
According to McCrohan and DeProspo, people following the case expected the Supreme Court to decide whether it will hear the case, but it appeared that a decision has been delayed. The Supreme Court was added to the court’s agenda this Friday, January 16.
Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
The analysts said the Supreme Court is expected to announce its decision whether it will take the case on Monday, January 19.
Fed allegedly overstepped authority over Durbin Amendment
The merchants alleged that the Federal Reserve overstepped its authority and took liberties in interpreting the Durbin Amendment.
The merchants argued that the Federal Reserve should have limited its analysis to incremental costs specific to a debit card transaction only to determine a reasonable and proportional debit card interchange fee.
The merchants believed that the Federal Reserve included certain fixed costs in its analysis as it believes that it was allowed since the Durbin Amendment’s language was silent on costs that were not incremental, but were actually required to process a transaction. Some of those are costs associated with connecting to the card networks.
Visa, Mastercard could be pressured
According to the analysts, the delay increases the odds that the Supreme Court would take the merchant lawsuit “ever so slightly.” They believed that any decision by the court to take on the case could pressure the shares of Visa and MasterCard citing the reason that it would introduce uncertainty on the Durbin Amendment and the debit card interchange fees.
McCrohan and DeProspo added that a court decision to take on the case will be perceived as a potential risk to the network fees earned by card networks from their card issuing clients.
Furthermore, the analysts emphasized that they will take advantage on any weakness resulting from the decision of the Supreme Court. According to them, “It is difficult to envision the Supreme Court siding with the merchants and concluding the Federal Reserve overstepped their authority.”
McCrohan and DeProspo also noted that the variable cost to process a debit card is very low. According to them, “If the Federal Reserve was only allowed to consider incremental costs in their determination of a fee cap, then fees could be cut in half, and the banks would need to either impose consumer fees or possibly exit the business entirely.”
The analysts further stated, “We do not view higher consumer fees as in the spirit of the Durbin Amendment and exiting the debit card business entirely would be a major inconvenience for consumers.”