MasterCard Inc. has long played second fiddle in debit cards, but regulatory reform could help the company gain share on Visa Inc.
Though the Federal Reserve Board has yet to draft specific rules, some of the provisions within the Dodd-Frank Act are already prompting banks to link their debit cards to additional payments networks.
Executives say much will depend on how the Fed interprets the section that bans so-called debit network exclusivity, but one scenario could lead to MasterCard's brand name being added to Visa debit cards.
"It's a well-known fact that Visa has far higher U.S. debit market share than MasterCard," said Jason Kupferberg, an analyst with UBS Securities LLC in New York. "Visa has a good amount of debit volume under exclusive contracts with issuers." But because the new law brings "debit network exclusivity to an end, it should theoretically open up potential for some other debit networks to pick up some share."
The provision states that card issuers cannot limit the routing of debit transactions to a single network, or multiple networks operated by the same owner. It does not specify whether issuers must provide at least two unrelated routing options on their cards or multiple unrelated options for both signature and PIN transactions.
If the Fed adopts the latter view, "the upside opportunity for MasterCard would become significantly" higher, Kupferberg said.
The idea resonated with Ajay Banga, MasterCard's president and chief executive. "I would completely agree with you," Banga said Tuesday during the Purchase, N.Y., payments company's earnings conference call in response to an analyst's speculation that the new rules could prompt more banks to link their debit cards to MasterCard's network.
Banga would not discuss any specific strategies that MasterCard is considering in response to the regulatory overhaul of the debit industry.
"We just have to wait for the Fed to develop the regulation and wait for our customers to react," Banga said, adding that MasterCard has spoken to the Fed about the regulations and plans to work "constructively with them."
Besides network exclusivity, the law requires the Fed to establish debit interchange rates that are "reasonable and proportional" to issuers' costs.
Purchase volume on MasterCard's U.S. debit cards in the second quarter was flat with a year earlier at $82 billion. Credit and charge card purchase volume rose 1.1%, to $121 billion in the U.S.
In comparison, Visa last week reported that U.S. debit card purchases rose 20.5% year over year, to $265 billion in the same three-month period.
Neither Visa nor MasterCard collect revenue from the interchange fees merchants pay banks, but the networks do get paid by banks based on volume.
Debit interchange is widely expected to fall and banks are bracing for a major hit to their revenue, though the impact will likely be less significant to the networks.
Still Banga joked that MasterCard's lower share could insulate it from any decline in debit transaction revenue. "This is one time when I'm probably grateful for not having had the highest market share of debit in the United States," he said.
Visa's chairman and chief executive, Joseph Saunders, also declined to speculate on how his company would be affected by the yet-to-be-written Fed rules on debit during its quarterly earnings conference call July 28.
MasterCard had 119 million U.S. debit cards as of June 30. Visa had 405 million as of March 31; it has not yet released the figures for the most recent quarter.
Some banks are already linking their debit cards to additional networks, according to Fidelity National Information Services Inc., which owns the debit network NYCE Payments Network LLC. "We absolutely do think there's some upside with our NYCE network," said Gary Norcross, Fidelity's chief operating officer, during the Jacksonville, Fla., company's recent earnings conference call.
MasterCard's net income for the quarter was $458 million, or $3.49 per diluted share, up from $349 million, or $2.67 per diluted share, a year earlier.