Visa Inc. and MasterCard Inc. posted double-digit revenue increases last quarter as nondiscretionary spending on cards cushioned the effects of the U.S. consumer slowdown and international and cross-border volumes continued to exhibit healthy growth.
The companies also announced a significant new step in an antitrust lawsuit Discover Financial Services filed against them, and touched on the economy's impact on issuer customers and the interchange debate in Washington.
Visa and MasterCard struck a deal in which Visa would have responsibility for a larger share of any adverse judgment or settlement in the Discover litigation, with the split "primarily based on relevant volumes," Joseph Saunders, Visa's chief executive, said in a conference call Wednesday. During MasterCard's earnings call Thursday, chief financial officer Martina Hund-Mejean said that "Visa would be responsible for the substantial majority of any judgment or settlement."
MasterCard, of Purchase, N.Y., also agreed to give up any claims it might have concerning fees in issuer contracts with Visa that were to be triggered if the issuers moved their debit portfolios to MasterCard. A federal court ruled last year that the fees violated the final judgment in an earlier antitrust case brought by the Department of Justice.
When asked about the timing of the deal with Visa, Ms. Hund-Mejean said, "I don't think I really can talk about … why now." However, she said that a court-ordered mediation between the three networks "did not lead to any results."
In June, David Nelms, Discover's CEO, said American Express Co.'s settlements with Visa and MasterCard "underscore the significance of the actual damages which we have been subject to over many years" when members of Visa and MasterCard were barred from issuing cards on his company's network.
Ms. Hund-Mejean said the court hearing the case "recently indicated that it expects to issue positions and summary judgment motions no later than Aug. 18, and has rescheduled the trial to begin on Oct. 14."
Visa's liability in the matter is to be absorbed by its bank shareholders under a structure established as a part of its initial public offering in March.
Mr. Saunders said Visa has taken a more active role in the debate over interchange legislation now that the company is "no longer subject to the IPO restrictions."
"While there is no way of knowing for certain what the final outcome will be, we feel better knowing that the issues are being appropriately debated," he said. "We have an ability to go" to Washington "and we have an ability to talk to them, and we have an ability to lay out the facts, and we are considerably more positive about the end result than we might have been even a couple of months ago."
Ms. Hund-Mejean said MasterCard-issuing customers' reactions to the downturn have varied.
"Some of our customers are feeling actually they could take advantage of this environment at this point in time and are more aggressive in terms of the account credit acquisition side and marketing side," she said. "But in general I would say that people are probably more cautious."
For the first quarter MasterCard reported a significant reduction in volume-based rebates to a single issuing customer that failed to meet contractual performance targets. Ms. Hund-Mejean said there was no "particular customer" that had such an impact in the second quarter.
Regarding the competitive threat posed by MasterCard's push to build its debit business, Mr. Saunders said, "We are mindful of what MasterCard has done," but "there is no way in the world … that we are going to lose any significant debit volume in the near future."
When asked whether Visa has experienced a slowdown in spending growth among its affluent-targeted cards, Mr. Saunders said: "Actually, our Signature volume has held up very, very well. … It's significantly up on a year-over-year basis. It's our traditional card volume that is down." However, "Signature cards are not the predominant part of our overall volume."
Visa's net income for its fiscal third quarter increased 41.1% from a year earlier, to $422 million, or 51 cents a share.
MasterCard reported a second-quarter loss of $746.7 million. Excluding a $1 billion after-tax charge related to its settlement with Amex, it made $276 million, or $2.11 a share, 9 cents higher than the average estimate of analysts. The company reported net income of $252.3 million a year earlier.
Visa said revenue this quarter would decline from last quarter but still come in at the high end of its target annual growth range of 11% to 15%; it had previously expected the U.S. slowdown to create a drag.
The company also raised its operating margin target from the low-40% range to the mid-40% range for its fiscal year that will end on Sept. 30 and the mid-to-high-40% range for the following two fiscal years.
Mr. Saunders said: "We have also begun to realize the positive impact of our operating scale and our efforts in reorganizing Visa as a publicly traded company. Revenue growth is strong and our expense base is currently growing at a very modest rate."
Late Thursday afternoon Visa's stock was off 6.5%, at $73.32; MasterCard's was off 10.5%, at $242.24.