Visa (NYSE:V), Mastercard (NYSE:MA) Hammered on Debit Fee Price Controls

Describe it as you want, the clueless Federal Reserve has proposed price controls on fees banks charge merchants for each transaction using a debit card, which could slash up to 90 percent of the revenue those fees generate, with Visa (NYSE:V) and Mastercard (NYSE:MA) especially vulnerable to the changes.

As in any type of price control, costs will go up, just as they do in the misguided rent control laws when they're implemented. In the case of debit cards, it's only a matter of where the prices will be place.

The immediate response is it would be in higher checking account fees from banks. Some could even end offering debit cards for consumer use. Whatever it is, it'll do more harm than good for consumers, who won't benefit from the cuts, even though that's the alleged reason for the proposal.

Businesses would be those benefiting from the proposal, as they'll end up paying a lot less for each transaction. With larger businesses that would run into the millions in savings.

While a lot of financial institutions will be affected if this becomes a requirement, Visa and Mastercard are especially vulnerable because merchants would be given a choice of using other networks to process transactions they now handle.

The fees that may end up being capped are called swipe fees or debit interchange fees.

This caught just about everyone by surprise as to the depth of the cut, as most had been looking for a worst case scenario of about 60 percent, and it'll come in at a revenue hit of from 70 to 90 percent. The fallout will be enormous.

Other than the obvious disaster this will be, critics of the proposal said the Federal Reserve didn't take into account the cost of financial institutions in battling and detecting fraud in debit card use.

Another is the size of banks that would be affected by the rule. It stands at market capitalizations of $10 billion or more, but that's mostly irrelevant, as smaller banks noted it will essentially be grandfathered into their debit cards as well for competitive reasons, based on lower fees at the larger banks, which they would be forced to put in place.

Visa closed at $67.19, down $9.75, or 12.67 percent. Mastercard closed at $223.49, down $25.73, or 10.32 percent.