Down, But Not Out: Visa Tries to Claw Back PIN Debit Business

It's about the war, not the battle.

After several challenging months, Visa (NYSE:V) is trying to stem the tide of PIN debit losses from recent regulations that require issuers to put at least two unaffiliated networks on debit cards.

Observers are watching closely to see how effective the San Francisco company is at implementing several previously announced strategies designed to motivate merchant-routing decisions. Whether the company can win back a substantial portion of the business remains to be seen, particularly as it balances concerns over an ongoing Justice Department investigation into whether its new tactics in that market violate antitrust law.

"The question is, can they claw back what they've lost?" says Sanjay Sakhrani, an analyst with Keefe, Bruyette and Woods.

Analysts estimate that the payments network, which had previously accounted for approximately 50-60% of the market, lost roughly half that share by the middle of this year. That's because Visa had a number of debit contracts with issuers that included exclusive use of both its signature and PIN debit networks.

It's hard to know how much Visa has lost in revenue, but it could be more than $100 million over a full year at current market-share levels, according to estimates.

The rule banning exclusivity — required by the Durbin Amendment — took effect in April, though Visa reported that business on Interlink, its PIN debit network, began to "deteriorate" starting as early as January.

Rival MasterCard (MA) has likely picked up about two-thirds of that lost share, with others including First Data's STAR network taking the balance, estimates Michael Taiano, an analyst at Telsey Advisory Group.

"I can't recall that kind of shift so quickly in network market share in the last ten years," says Eric Grover, a principal with payments consultancy Intrepid Ventures.

Spokesmen for both Visa and MasterCard declined to comment for this story.

But the latest estimates provided by Visa last month on an earnings call with analysts suggest the worst may now be over, in line with the company's previous predictions.

"So far, the month of April has proven to be the trough in debit-payment-volume loss, and since then, we have seen sequential monthly progress during the quarter in recapturing portions of this Interlink volume," said Byron Pollitt, the company's chief financial officer, on the fiscal third-quarter earnings call.

The company reported that while debit payments volume, including both signature and PIN transactions, was down 9% for the quarter ended June 30 from a year earlier, it had fallen just 7% for the subsequent period through July 21.

"Deceleration of growth seems to have kind of troughed somewhat," notes Sakhrani. "We're now possibly going the other way, which would suggest they are starting to take back a little bit of what they've lost."

And while its PIN debit business accounts for just 2-3% of total revenue, Visa has announced that it's taking several measures to combat the decline.

"This is more about market share and affecting their transaction and volume numbers, and less about directly impacting them financially," says Greg Smith, an analyst at Sterne Agee.

Last year the company announced that it was changing its price structure in response to the new rules, adding what's known as a fixed acquirer network fee (FANF) and reducing variable fees merchants and acquirers pay for each transaction.

The change, which went into effect in April with the start of the rules, may motivate merchants because their incremental costs for each transaction processed will be reduced under the new pricing regime.