Visa Steps Up Merchant Perks to Fight Debit Attrition

Visa Inc. next year plans to ramp up a series of incentives for merchants and acquirers, as the world's largest payments network braces for new regulations that are expected to cost it some debit transactions.

New Federal Reserve rules require debit cards to carry at least two different brands, meaning that merchants or their acquiring banks will have a choice of which network will process each debit card transaction.

The new routing rules go into effect on April 1, but Visa is already trying to convince merchants and acquirers to continue using its debit network.

The network on Jan. 2 will unveil new debit network card-processing fees that will go into effect April 1. As part of that initiative, Visa plans to make it attractive for merchants to process debit card purchases as PIN transactions as well as signature-based ones, chief executive Joe Saunders told analysts during a Wednesday conference call to discuss the company's quarterly results.

Debit card purchases typically can be processed via a signature debit network, when a customer signs for a purchase, or a PIN debit network, when a customer types in a four-digit code.

"To address the pockets of debit revenue at risk as a result of the regulation, particularly revenues related to PIN debit, we are moving forward quickly with a program to incent routing decisions," Saunders said, declining to provide specifics.

The new regulations affect approximately 20% of Visa's total revenue, and of that, signature debit contributes more than 75% of U.S. debit revenue, Saunders said.

Visa "reminded clients" recently that it is "fully capable of facilitating both signature and PIN-debit transactions" over its network, Saunders said, noting that the dual-processing capability is "an important competitive advantage and differentiator in the new environment."

Analysts during the call pointed to the consumer outcry against monthly debit fees that some banks are testing or have promised to introduce next year, in a bid to recoup the revenue that they will lose from the Fed's new debit interchange fee limits.

Saunders acknowledged that debit comprises the lion's share of Visa's card purchase and transaction volume in the U.S., but said he is not worried about Visa losing significant debit market share because of recent regulatory and market developments.

"I don't believe that anything that's happening is going to substantially alter the macro debit volume in the United States," Saunders said. "I don't think (debit) is going to go away. Even the one fee that has been specifically announced is a flat fee. It doesn't make any difference-it's not upper-transaction fees or anything of that nature."

But the combined effects of the recession plus new regulations is likely to cause "a lot more activity" in prepaid cards, Saunders said, noting Visa's prepaid card growth is "very significant."

The company on Wednesday reported fiscal fourth-quarter net income of $880 million, up 13.7% from $774 million a year earlier. Operating revenue for the quarter ended Sept. 30 rose 14.3%, to $2.4 billion from $2.1 billion.

U.S. debit card purchase volume rose 8.3%, to $288 billion from $266 billion. Debit card purchase volume from regions outside the U.S. rose 39.3%, to $85 billion from $61 billion.

U.S. credit card purchase volume rose 10.1%, to $228 billion from $207 billion. Credit card volume from regions outside the U.S. rose 25.1%, to $369 billion from $295 billion.

Visa's credit card purchase volume showed healthy gains, and data through October show continued growth, said Byron Pollitt, Visa chief financial officer. But most of the credit card growth Visa has seen in recent quarters has been from the affluent sector only, he said.

"As we enter fiscal 2012, it is worth noting that we have not yet seen any discernible broadening of the U.S. credit spending base beyond this affluent income group," Pollitt said.

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