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Higher spending on its credit and debit cards boosted MasterCard Inc.'s second-quarter net revenue by 22.1% from a year earlier.
August 3 -
Visa's fiscal third-quarter net income rose 40.4% due partly to a gain from the revaluation of a deal with Visa Europe.
July 27
Visa Inc. fired a preemptive strike in the post-Durbin pricing war. For now, MasterCard Inc. is holding its fire.
MasterCard said Wednesday that it does not plan any broad changes to the fees that merchants and their banks pay the network for processing card transactions. Last week Visa changed its fees across the board.
"We're going to be very thoughtful and very surgical in how we approach the opportunities in PIN and signature debit as it unfolds under Durbin," Chris McWilton, the president of U.S. markets at MasterCard, said on an earnings conference call Wednesday.
The Purchase, N.Y., payment network has no impetus to overhaul its pricing, since under the new regulations it's likely to gain market share simply by being there.
The Durbin amendment to the Dodd-Frank Act forbade exclusive debit network routing deals, of which MasterCard (a debit card laggard) has few and Visa (the market leader) has many. The regulation requires banks to include at least two unaffiliated processing networks on their debit cards. That means a card that carries Visa's logo for signature transactions must carry at least one non-Visa network for PIN transactions.
Many banks already offer multiple PIN networks, such as First Data Corp.'s Star and Fidelity National Information Services Inc.'s NYCE. But many other banks have exclusive deals, most commonly with Visa. Under such arrangements, banks use Visa to process signature debit transactions and its Interlink network for PIN transaction, typically in exchange for financial incentives.
Because Visa processes the lion's share of U.S. debit card transactions and has more banks under exclusive routing deals than any other card network, it stands to lose the most volume, particularly on the PIN debit side, under the new rules.
Visa could lose 50% to 80% of its PIN debit volume, according to Eric Grover, a principal with the payments consulting firm Intrepid Ventures and a Visa veteran.
"The battle lines over routing are still unfolding," MasterCard's McWilton said. "Being the smaller player in U.S. debit, MasterCard is … in a completely different competitive situation. Ours is one of potential upside, not the need to defend a large incumbent position. As a result, we will be looking at strategic, surgical opportunities with issuers, acquirers and merchants."
Visa last week announced that it is introducing a new "network participation fee" that merchant acquirers would have to pay. Acquirers would pay the annual flat fee in monthly installments and pass it along to their merchant clients. Visa intends for the fixed fee to offset decreases to variable transaction fees that acquirers pay. It is lowering the variable fees to encourage merchants to continue routing their transactions over its network.
"What was a positive surprise for the market is that MasterCard went out of [its] way to make a couple of things clear. One is that they have no interest in starting a pricing war in the U.S. debit market," Jason Kupferberg, a senior analyst with Jefferies & Co., said in an interview.
MasterCard also plans to support a two-tiered interchange structure so that banks with less than $10 billion in assets, which were exempt from the Durbin amendment's rate caps, can earn higher interchange rates, McWilton said. Visa earlier said it plans to support a two-tiered price structure. (The Durbin amendment also instructed the Federal Reserve Board to set debit interchange rates that are "reasonable and proportional" to card issuers' costs; the Fed issued final rules in June.)
MasterCard's shares rose as much as 9.4% Wednesday, to $326.57, after the company outlined its strategy and reported a 32.8% year-over-year increase in second-quarter net income, which reached $608 million.
Since PIN debit transactions earn less than other transaction types, MasterCard lacks pressure to make massive price changes. These transactions have positive operating margins but the revenue gained on a per-transaction basis is low, MasterCard's executives said.
"You may get more volume growth than revenue percentage growth, yet … the cost of processing those transactions incrementally at the margin is very small for our company," Ajay Banga, MasterCard's president and chief executive, said during the call.
As a result, MasterCard is "not in the game to go out and buy every PIN transaction we can," McWilton said.
Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey, said the approach makes sense "given the relatively low revenue yields and likely declining revenue yields in PIN debit."
Overall, MasterCard experienced positive results on account of higher spending on its credit and debit cards during the quarter.
The company said its net revenue increased 22.1%, to $.17 billion.
The number of transactions that MasterCard processed grew 17.4%, to 6.6 billion, and the amount of money customers spent with its cards rose 16.4% on a local currency basis, to $811 billion. The latter figure includes card purchases, balance transfers and convenience checks.
"We have delivered really good results for the first half of 2011, due not only to the strength of our base business across all five of our regions but also driven by volume and transactions from new deals," Banga said.
