Visa Inc. lost a lot of its swagger when it revealed anemic debit card purchase-volume growth during the quarter ended March 31, plus the implications of a troubling Department of Justice investigation into the network's debit card policies that have irked merchants.

Despite those dark clouds, the payment network reported net income of $1.3 billion for its fiscal second quarter, up 47.7% from $880 million a year earlier. Operating revenue rose 14.7%, to $2.58 billion from $2.25 billion (see story).

During a May 2 conference call to discuss earnings with analysts, Joe Saunders, Visa chairman and CEO, signaled various concerns surrounding Visa's debit card operations.

U.S. debit card purchase volume rose 2.2% during the quarter, to $284 billion from $278 billion a year earlier, while credit card payment volumes, which had declined for several quarters throughout the recession, rose 12.1%, to $223 billion from $199 billion.

On a broad basis, Visa's debit card purchase-volume growth has slowed because of the Durbin amendment, which prompted new Federal Reserve Board rules that, beginning Oct. 1, essentially cut in half how much larger issuers receive from acquirers in debit card interchange (see story).

Many issuers subsequently eliminated their debit-rewards programs, Saunders said.

Debit rewards "did drive volume," and their loss has hurt debit card momentum overall, Saunders said.

But volume on Visa's Interlink PIN-based point-of-sale debit network, in particular, has recently "experienced notable deterioration" because another new Fed rule tied to Durbin changed card network routing rules, Saunders said.

That rule, which went into effect April 1, requires issuers to provide merchants with the choice of at least two unaffiliated PIN-debit networks for processing transactions. And while Visa's share has fallen, MasterCard this week boasted its PIN-debit market share increased 20% during April (see story).

Saunders also noted that on March 13, the Justice Department’s antitrust division opened an investigation into Visa's PIN-debit strategies, including the fixed acquirer fee the network put into effect April 1 (see story).

Although Saunders declined to go into many specifics about the investigation, he said Visa devised the fixed acquirer, or merchant fee, as a way "to deal with" the Durbin amendment, and the network is cooperating with the government and providing further information.

"We are not making money per se off of that fee," Saunders said. "The combination of discounts and incentives that we have put together, I think, actually relate in a modest loss in the neighborhood of $100 million a year. So we aren't doing this would the intent of raising prices."

Saunders went out of his way to play up Visa's market-share losses resulting from the Fed eliminating network-exclusivity arrangements between networks and issuers.

"Let me just follow up on that and make perfectly clear one thing, and that is that we are never going to regain all of the market share that we had in the debit card business," he said. "Nothing that we say or none of our strategies suggest that that will happen or could happen. And nothing that we have done or thought about or said anticipates that it will happen. The environment has changed by regulation. We are operating in a different world, and we are going to live forever with less share than we once had."

Visa likely will absorb further losses from the combined effects of Durbin through the third quarter of this year, Saunders said. Then it may have an opportunity to make up some lost ground beginning in the fourth quarter, he suggested.

Saunders expects organic growth to help grow debit card purchase volume later this year, noting that Visa has signed agreements with 14 of its 15 largest U.S. debit card issuers to continue to use the Visa logo for debit transactions through "at least 2015."

The network-routing rule also created some fresh opportunities for Visa with banks that previously carried only MasterCard's Maestro brand, Saunders said. And some banks that previously had no PIN-debit capability are adding Visa's Interlink brand this year.

"There were some small pockets of cards that were put out that never had a PIN capability, and the regulation requires that that change. And so people that simply couldn't use a PIN number can now," he said.

Credit was Visa's "star performer" during the quarter, Saunders said.

In the U.S., Visa recently signed an agreement with Alaska Airlines to extend its cobranded credit card agreement, and it won "important new credit business" from multiple issuers Saunders did not name.

Visa also plans to expand its policy of requiring no signature on lower-ticket credit card transactions, he said.

Beginning in October, Visa will increase the limit for not requiring a signature to $50 from $25 for credit card purchases at discount stores and supermarkets, with plans to expand the policy to other merchant categories over time, Saunders said.

Visa's credit card purchase volume outside the U.S. rose 14.8% during the quarter, to $365 billion from $318 billion.

Growth in various global markets was also positive.

Total credit and debit purchase volume in Asia rose 16.1%, to $267 billion from $230 billion. Total purchase volume in Latin America rose, 18.2% to $91 billion from $77 billion.

Total purchase volume in Canada rose 6.3%, to $51 billion from $48 billion, and in the Central Europe, Middle East and Africa region, total purchase volume rose 36.7%, to $41 billion from $30 billion.

In late aftgernoon trading May 3, Visa's stock had dropped about 5%, to $115.92 from the previous day's closing price of $122.19.

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