Three months into a new rule capping debit card interchange fees, market leader Visa Inc. is showing a modest slowdown in its U.S. debit business, but nothing on the order of the doomsday scenarios once predicted.
The Federal Reserve Board implemented a rule to limit interchange fees to about 24 cents per transaction, about half what merchant acquirers paid issuers previously, under a mandate from the so-called Durbin amendment in the 2010 Dodd-Frank law. The rule went into effect Oct. 1.
“After seeing MasterCard’s and Visa’s results, the impacts from Durbin so far have been muted,” says Gil Luria, a managing director at Wedbush Securities (see story).
Still to come is another rule requiring PIN-debit marks from at least two brands on the back of each card, giving merchants a choice of debit networks on which to process a transaction.
In response Visa last year announced that it would be rolling out an incentives plan to sway merchants to process transactions using Visa’s network (see story).
Joseph Saunders, Visa chairman and chief executive, reiterated on a call with analysts Feb. 8 that Visa is moving forward with that strategy.
“As a next step in our implementation plan, we will share specifics with acquirers and merchants later in the month,” Saunders said.
But he conceded that the impacts of the new debit card rules were visible.
“The deceleration of our U.S. debit-volume growth during the first quarter was an early sign of this impact, driven by slower growth in PIN transactions and an expected de-emphasis by issuers of debit card marketing and debit-rewards programs,” said Saunders. “A key driver of this slower growth was one major financial institution’s decision to remove Interlink from the back of their cards, which began in the fall as part of their own plan to comply with the regulation.”
But it still remains to be seen how banks, merchants and consumers will adjust their habits as a result of the new rules, and what that will mean for Visa and competitor MasterCard Worldwide.
“The caveat is we haven’t seen it fully implemented yet and haven’t seen responses fully played out yet,” says Wedbush’s Luria.
Saunders on the call emphasized that the biggest hits from the debit rules are expected in to take place in 2012.
“We expect that 2012 will take the brunt of the impact related to U.S. debit regulation, and we still expect growth in 2013 to accelerate off of the 2012 levels,” he said.
But at the same time, some say a shift away from debit ultimately could help Visa offset any losses on the debit side, particularly the loss of any PIN-debit transactions, which traditionally have been unprofitable.
“The mix shift is going to higher credit card volumes, which is a much more profitable business,” says Darrin Peller, an analyst with Barclays. “I’m not sure they completely accounted for the benefits of the mix shift.”
In response to an analyst question about such a shift, Saunders said that some movement was likely, though it was to too early to predict “exactly what kind of switch there may be.”
“Anecdotally, of course, you know that rewards have been removed from debit cards and rewards exist on credit cards. So … just logically, you’d have to assume that there’s some movement in that regard,” he said.
On whether the move to credit would heat up competition in that market, Saunders said he was confident in Visa’s position in credit cards, in part thanks to some new transactions on the horizon.
“I’m very bullish on where we’re going to wind up in 2012 as a result of some new transactions that are on the cusp on occurring. ... I’d have to say as it regards credit, we’re in a pretty good position.”
The networks continue to enjoy higher interchange rates for credit cards than for debit. But those rates also are under assault in a long-running court battle in which numerous merchants, including Safeway Inc., Collective Brands Inc.'s Payless ShoeSource and Kroger Co., are charging that the networks and some large banks violated antitrust laws in setting those rates (see story).
Visa’s Saunders discussed ongoing settlement negotiations in the lawsuits on the Feb. 8 analyst call, following similar statements by MasterCard’s president and chief executive Ajay Banga Feb. 2 on an analyst call discussing the company’s fourth-quarter earnings (see story). MasterCard announced in its earnings release that it was setting aside $495 million after tax for a potential settlement in the litigation.
On the Feb. 8 call, Saunders reiterated that, thanks to previous deposits, the company now has $4.3 billion set aside in a litigation escrow account, which he says is “consistent with our view of the current status of mediation discussions.”
“Visa is unwilling to agree to any significant or long-term credit interchange rate reductions or any settlement agreement that doesn’t provide a full resolution to that and other key issues,” he said, practically mirroring language used by Banga last week.
Despite the debit headwinds, Visa posted strong earnings, upwardly revising its fiscal year 2012 revenue and earnings per share expectations.
Visa posted a profit of $1.03 billion, or $1.49 per share, up 16.4% from a year earlier. Revenue rose 13.8%, to $2.55 billion.
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