U.S. Bancorp executives view the issuer's portion of the proposed $7.25 billion swipe-fee settlement, which some merchants are fighting, as an expense already incurred.
The settlement "that seemingly nobody likes" is acceptable, Richard Davis, the bank's chairman, president and CEO, told analysts during a July 17 conference call to discuss second-quarter earnings. The bigger question is what merchants might do with the temporary, eight-month cut in interchange rates and their new ability to add a surcharge, he said.
U.S. Bank, which is not a direct party in the case, set aside $65 million during the second quarter to cover the temporary reduction in interchange, Andy Cecere, vice chairman and chief financial officer, told analysts on the call. The litigation began in 2005.
Whether merchants pass along their reduced costs to customers could prove interesting, Davis said.
The bigger issue, though, is the permission the settlement gives to retailers to surcharge Visa and MasterCard transactions, but not ones initiated with American Express cards, Davis said.
"I do think it is very interesting and provocative to see what kind of actions the retailers will take because typically surcharging is a negative feeling," he said. "I would suspect that most of them probably won't jump on it."
Davis also acknowledged that the settlement isn't final and that merchants still may opt out.
"It may, in part, be just a starting point to the continuing saga that is now 7 years old," he said. "I think we have a lot to watch. … This was a retailer-versus-card business, and I think it has got probably halfway through the game. We will see how it goes in the next couple months."
Asked for his outlook on the issuer's credit card program, Bill Parker, executive vice president and chief credit officer, cited the "very favorable" conditions for cards in current market. "It's a competitive market, but the credit outlook is very strong," he said.
U.S. Bank has focused on improving card-account originations in its retail branches, Parker noted. "That gets a very high-quality customer, one that we can provide other products and services to," he said. "So that is one change that we have really focused on especially this year."
But the focus will not be on subprime or near-prime consumers, Davis added.
"We will continue to extract more opportunity from the customers we have," he said. "But I am not going to go into an underwriting game here to try to improve the volume."
A higher provision for credit losses, partially offset by an increase in total net revenue, helped to drive down profit for the Payment Services business at U.S. Bancorp, the issuer reported July 18.
The unit, which includes consumer and business credit cards, stored-value cards, debit cards, corporate and purchasing card services, consumer lines of credit and merchant processing, generated a $316 million net profit for the quarter ended June 30, down 12.9% from $363 million during the same period last year. Total net revenue increased 2.6%, to $1.19 billion from $1.16 billion.
Credit and debit card revenue decreased 17.8%, to $235 million from $286 million, because of lower debit card interchange fees resulting from new Federal Reserve rates that went into effect Oct. 1 under the Durbin amendment to Dodd-Frank and the impact of now classifying credit card balance-transfer fees as interest income.
"However, these negative variances were partially offset by higher transaction volumes and an $18 million credit related to the final expiration of debit card customer rewards," U.S. Bank said in its earnings release. "Partially offsetting this decrease, corporate-payment products revenue and merchant processing services revenue increased due to higher transaction volumes, and other revenue increased due to a merchant processing-related gain."
Corporate payment products revenue increased 2.7%, to $190 million from $185 million in last year’s second quarter. Merchant processing services revenue totaled $359 million, up 6.2% from $338 million. ATM-processing services revenue was down 21.9%, to $89 million from $114 million, because of a change earlier this year to classify surcharge revenue passed through to others as a reduction of revenue instead of as an occupancy expense.
Average credit card loans during the quarter were $16.7 billion, up 5.2% from $15.88 billion. Net card charge-offs were $170 million, down 21.3% from $216 million. The net charge-off rate was 4.1%, down 135 basis points from 5.45%.
Credit card charge volume totaled $26.62 billion, up 7.7% from $24.71 billion. Broken out, retail payment charge volume was $14.08 billion, up 12.7% from $12.49 billion. Corporate payment services charge volume was $12.54 billion, up 2.6% from $12.22 billion.
On the acquiring side, merchant volume totaled $80.5 billion, up 10.7% from $72.7 billion. Transaction volume during the quarter totaled 921 million, up 14.6% from 803.5 million. Debit card transaction volume grew 6%, to 12.4 million from 11.7 million.