MasterCard Inc.’s role as the second-largest brand to Visa Inc. in the U.S. credit and debit card markets along with economic uncertainty will continue to cast a shadow on the company’s domestic performance for the remainder of the year, MasterCard CEO Ajay Banga told analysts during an Aug. 3 conference call to discuss second-quarter earnings.

The company’s global operations, however, continue to shine (see story). 

MasterCard said it is beginning to see the bottom-line effects of losing certain U.S. debit card portfolios, including Washington Mutual Inc., which JPMorgan Chase & Co. acquired in late 2008 and gradually is converting to the Visa franchise. Those losses likely will “bottom out” during the third quarter, with negative effects trailing into the fourth quarter, Banga said.

The pace of recovery in the U.S. also remains shaky, Banga said. But given MasterCard’s increasing efforts to diversify its payments offerings and its greater reliance on global operations that continue to show healthy growth rates, MasterCard’s long-term outlook remains solid, he told investors.

Markets outside of the United States account for 55% of MasterCard’s total revenue, “up from about 50% two or three years ago,” Banga noted, which is a trend he expects to continue.

Company officials also noted volatility associated with MasterCard’s heavier reliance on international markets. The relative weakness of the euro cut revenue by about 1%, and for every penny shift in the euro-dollar exchange rate, MasterCard’s net revenue will move by $9 million to $11 million, company officials said. Lately the euro has gained on the dollar, to about $1.31 per euro from about $1.19 two months ago.

Banga was circumspect about this week’s news that a consortium of telecommunication companies is planning a mobile-payments test with Barclays PLC and Discover Financial Services that may cut out traditional bankcard players.

The announcement “of one unconfirmed pilot in the United States makes me somewhat cautious about jumping to conclusions about the role that different companies will play in the space,” Banga said, adding he believes telcos, handset manufacturers and banks ultimately will need to cooperate to create “an open payment system.”

Pressed by analysts to speculate about the effect of legislation signed into law recently that will dictate new debit-interchange regulations, Banga said the changes “may open up both opportunities and challenges,” noting MasterCard’s relatively lower debit card market share could “give us an opportunity to be nimble” when reacting to any changes, although he declined to outline any specific scenarios.

The legislation calls for the Federal Reserve Board to set “reasonable and proportional” debit-interchange rates, which would go into effect sometime next year. Observers speculate the new rules will reduce card issuers’ interchange revenue (see story). 

Banks likely will cut costs and adjust their product pricing in reaction to debit-interchange disruptions, Banga said. “You’re already seeing ... the soon-to-happen demise of free checking,” he said.

Asked about the feasibility of the U.S. adopting chip-and-PIN technology in the near future, Banga was pessimistic.

“I’m not sure that chip-and-PIN technology in the U.S. is a definite in the next foreseeable period of time, unless it gets legislated,” he said, noting the cost to banks to roll out an acceptance network and reissue chip-equipped cards would be “challenging” at a time when banks’ revenue streams are under pressure from economic and regulatory developments.

On a positive note, prepaid cards present a “huge” opportunity for MasterCard, Banga said, noting the company has contracts to provide prepaid card payments with the Social Security Administration and remains “very focused” on government payroll and consumer reloadable debit cards as growth areas in the U.S. and in Europe.

MasterCard reported net income of $458 million for the quarter ended June 30, up 31% from $349 million a year earlier. Net revenue was $1.37 billion, up 7% from $1.28 billion.

Total operating expenses decreased 10.4%, to $648 million from $723 million, as MasterCard cut general and administrative expenses, including personnel.

Martina Hund-Mejean, MasterCard chief financial officer, noted during that call that despite the cuts, the company continues “adding talent in growth areas such as e-commerce, mobile and prepaid” (see story). Advertising expenses remained flat at $180 million.

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