MasterCard, Profit Up 23%, Doesn't Expect Near-Term Hit from Debit Interchange Cap

The Federal Reserve Board's debit interchange cap is set to go into effect July 21, but MasterCard Inc. said it does not expect to feel its impact until at least next year.

Under the current proposal, interchange rates for debit cards would be capped at 12 cents per transaction for issuers with over $10 billion of assets. It is the issuers, not the card brands, that get revenue from interchange, and many issuers will not change their policies the moment their interchange rates are trimmed from the current average of 44 cents.

Many of the changes banks are considering would aim to restrict consumers' debit use, and once that happens MasterCard will feel the effects.

Issuers "are looking at reducing the reward levels on their debit card activity," Ajay Banga, MasterCard's president and chief executive, said Tuesday on a conference call with analysts to discuss first-quarter results. "They're looking at fees on debit cards. They're looking at restricting the manner in which debit cards get used, either for large-ticket items because of concerns around fraud losses or at the bottom end, for small-ticket items."

Executives of Visa Inc. and MasterCard have taken a hard line on the interchange rules. Executives at both companies have pointed to unintended consequences that they say will ultimately harm consumers. Each has made lobbying efforts to delay, or ultimately abolish, the financial reform, and legislative efforts are under way to do just that.

Visa has already announced that it will support a two-tiered interchange system to accommodate higher interchange rates for smaller financial institutions. MasterCard has not yet said whether it would support a two-tiered rate structure.

Banga said that exclusivity and routing rules could be a boon for the company in that it could draw traffic away from its rival Visa.

"If there is a ruling that blows up the exclusivity arrangements that Visa has, that's a good thing for MasterCard," said Thomas C. McCrohan, managing director for equity research at Janney Montgomery Scott LLC. "But there are so many moving parts that I don't know how anyone could speak with conviction of who is going to win or lose at the end of the day."

Banga said the simpler the routing rules, the better.

"It's only if the routing options that come out are somewhat simpler than that and are limited to having a nonconnected PIN brand along with a signature brand — one in the back, one in the front on a card. I think that is the opportunity," he said. "I'm looking out and saying just given the reality of my lower share, that should give me some volume benefit over a period of time."

On the call with analysts, Banga also discussed recent additions that are meant to diversify MasterCard's "revenue streams across different kinds of clients."

Banga highlighted the card brand's newest board member, Rima Qureshi, a senior vice president and business unit head for Telefonaktiebolaget LM Ericsson's CDMA Mobile Systems business.

The addition of Qureshi could help MasterCard move ahead in mobile payments, an area that many in the payments industry are focused on. Several banks and vendors are testing technology that would allow consumers to turn their phones into digital wallets that can be used for payment at the point of sale.

Qureshi "hopefully brings not just global knowledge with her and her global expertise in running a business as well as being a very active research and development scientist at Ericsson," Banga said, "but also brings direct, let's say, domain expertise in the mobile space."

MasterCard's first-quarter results beat analysts' expectations. Its profit rose 23.6% year over year, to $562 million. Revenue rose 14.8%, to $1.5 billion. MasterCard said fluctuations in foreign currency and natural disasters overseas did not affect its bottom line.

MasterCard shares rose 2.58% Tuesday, to $282.38.