Visa Stems Decline in Debit Volume

Visa (NYSE: V) seems to have weathered the most severe effects of new rules that shook its hold on the U.S. debit card market, though the company still faces a government investigation into the methods it is using to recoup lost revenue.
The card network said Wednesday that its U.S. debit card volume fell by 6% in the quarter that ended Sept. 30, compared to a 9% slide during the previous three-month period.

Those declines are the result of new rules ensuring merchants have the choice of using at least one PIN debit network and at least one separate signature debit network each time a customer steps to the cash register.

The rules, which took effect earlier this year, initially ate away at Visa’s dominance in the market for debit transactions, benefiting competitor MasterCard (MA).

“Their market share just crashed over a couple months there, but they appear to have clawed back a pretty significant share,” said Eric Grover, a payments consultant with Intrepid Ventures.

Even with the lost revenue, Visa had adjusted net income of $1 billion in the most recent quarter, while reporting an adjusted annual operating margin of 60%. The company projected a similar operating margin over the next 12 months, including all costs related to the new debit card rules.

During a conference call with analysts, Visa Chief Financial Officer Bryan Pollitt said that the total impact of the new debit card rules on its earnings in the most recent quarter was 4 cents per share, which works out to a 2.5% percent hit on the company’s bottom line.

Going forward, the biggest challenge for Visa’s debit-card business may involve the Department of Justice, which in March opened an investigation of its debit strategies Chief Executive Joseph Saunders said Wednesday that Visa is regularly submitting information to the Justice Department, but he had no material update on the investigation.

“The company will continue to update you as the situation develops, but we remain comfortable in our position on this issue,” he said.

On the conference call, Visa executives offered assurances that the company’s strategies for mitigating the impact of the new rules have been effective.

One of Visa’s strategies involves signing deals with merchants to provide them lower rates if they steer more debit transactions to Visa.

“For the most part, they only pay out incentives if the volume is delivered,” said Saunders, who was handling his final earnings call before turning over the reins to JPMorgan Chase (JPM) executive Charles Scharf. 

“To a certain extent, there is a degree of variability with regards to how much incentives will be paid out, and it will be completely tied to the volume delivered.”

That structure provides an incentive to large retailers to route purchases over Visa’s networks, since they will sell enough merchandise to qualify for the discounts.

Pollitt said that Visa is effectively reducing its debit prices in response to the new rules. “So the revenue growth for the next year is going to be delivered the good old-fashioned way, by driving hard against payment volume,” he said.
But those reduced prices are being offset, at least somewhat, by a monthly fee, known as the fixed acquirer network fee, which Visa introduced earlier this year.

Because of Visa’s large presence in consumers’ wallets, merchants and their banks are hard-pressed to avoid the fee, but analysts say that smaller payment networks run the risk of being dropped by merchants if they try to impose a similar fee.

A third Visa strategy, according to Grover, has been to run PIN debit transactions over its signature debit network.
Nomura Securities raised its price target for Visa stock from $140 to $150 on Thursday, in part as result of its conclusion that the company’s efforts to combat the rule’s effects have been successful. Visa’s shares closed at $143.90 Thursday, up 3.7% from Wednesday’s closing price.

Still, Visa has lost market share to MasterCard, a subject that remains a sore spot at Visa.

When an analyst on Wednesday asked Pollitt whether customers prefer using PIN debit to signature debit, he responded: “I suppose we're in a bit of an odd position to comment on this because ...thanks to a regulatory change, a substantial part of our PIN market share was gifted to our competition.”

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