Quarterly results at MasterCard Inc. and Visa Inc. showed how intense — and expensive — the payment networks' battle for issuer business has become as the crisis forces the banking industry to consolidate.
"Every day, it's a street fight," is how Robert Selander, MasterCard's chief executive, described the fight for business amid the shake-up among banking companies.
Rebates Visa provides issuers and others to encourage the use of its brand and network jumped 25.5% in the quarter from a year earlier, to $344 million, while gross revenues increased 5.5%, to $2 billion. Its chief executive, Joseph Saunders, attributed the "elevated volume and support incentives" to renewals of client contracts, some prompted by bank deals, "a situation we do not expect to repeat at these levels."
He said the renewals during the San Francisco company's fiscal third quarter, which ended June 30, included 11 contracts that account for 26% of its global transactions volume and 34% of its domestic volume.
"With these signings, we now have no major contracts up for renewal in the next two years and have over 75% of our worldwide payment volume under contract," he said.
In May, Visa notched a major debit win when JPMorgan Chase & Co. said it would switch much of the portfolio of Washington Mutual Inc., whose banking operations it acquired last September, to the Visa brand.
Byron Pollitt, Visa's chief financial officer, said on its earnings call late Wednesday that the company is pursuing longer-term contracts. When Visa went public in March 2008, "the most typical contract length was five years," Pollitt said. "But we are seeing some … substantive contracts that are going beyond five years."
At MasterCard, of Purchase, N.Y., fee rebates and incentive payments climbed 2.1% from the first quarter, but dropped 5.8% from a year earlier.
In an interview Thursday, Martina Hund-Mejean, MasterCard's chief financial officer, said weaker transaction volume caused the drop, "but there's always a mixture. … We actually did sign quite a few contracts this quarter, like we do every quarter" and a major deal could cause a spike in any particular period.
She said it was unclear whether, overall, concessions needed to win business are becoming larger than in the past because of factors like consolidation and the financial straits of many issuers.
"It depends on what kind of business you are looking at, and in what region or country," she said. "There are some agreements where that is the case, and there are some agreements where it's absolutely not the case."
Selander said on the call that he expects additional bank mergers to shake business loose.
"When those things happen, you tend to get jump balls earlier than you might have otherwise in terms of a renegotiation or reopening of agreements," he said.
Tien-Tsin Huang, an analyst at JPMorgan Chase, said it's too early to know whether Visa is being more aggressive than MasterCard — or too aggressive — in offering concessions.
"Overall, the rebates and incentives that Visa is paying out are still within their longer-term guidance on an annualized basis," he said. "They accelerated a lot of rebates from the future into one period" by renewing contracts early "and they were able to do that without sacrificing earnings."
"One of the concerns that we had dating back to the [initial public offering] was that they had several large contracts coming up for renewal in fiscal 2010. Investors had been worried about pricing, or the risk of loss," Huang said.
Discussions on some of those contracts may have been accelerated because of consolidation, so Visa "went ahead and cleared the way and got those re-signed all in one quarter," he said. "That should improve the incentives outlook."
Still, Huang said, MasterCard's results show it "is being disciplined on price. They're not willing to go into a price war with Visa. We think that's a positive for both companies."
Transaction volumes posted by the two payments companies suggested a steadier trajectory for revenues following the free fall in consumer spending in the second half of last year.
Retail sales have leveled off so far this year, and so have year-over-year declines in credit card purchases, albeit at high levels — 16% at MasterCard for the three months that ended in June and 10% at Visa.
Year-over-year growth in debit purchases has stabilized in the low- to mid-single-digit range, well off the mid- to high-teens range posted as recently as the third quarter of last year.
Visa said it still expects to return to its medium-term net revenue growth target of 11% to 15% in its next fiscal year, rebounding from the high single digits in this one.
MasterCard was more cautious on the future health of consumers. The company said that its expectation for sluggish revenue growth this year (net revenue increased 0.3% from a year earlier in the first half) makes it impossible for it to reach its previous goal of an average of 12% to 15% from 2009 to 2011. The company declined to predict whether it will return to its medium-term target in the next two years.
But both networks continued to adhere to strong earnings growth targets, which they have maintained through the recession in part by sharply reducing expenses.
Visa posted a 72.7% increase in net income from a year earlier, to $729 million for its fiscal third quarter. MasterCard reported that it swung to a net profit of $349 million in the second quarter. (In the year-earlier period, MasterCard recorded an expense of $1.6 billion associated with a settlement of an antitrust lawsuit.)
Even if an economic turnaround materializes, both companies cast doubt on the prospects for a near-term recovery in credit card volumes.
Saunders said debit "is the entire basis of" Visa's "media campaign in the United States this year."
Though he said he does not believe "that the credit card is dead," given loan losses and sweeping new regulations, "it would just be naive to think that there wouldn't be some reflection as it related to that product and how it was going to be issued and how it was going to be used."