Visa Inc. has revamped its debit interchange fees, making its PIN and signature rates identical.
The two types of payments have traditionally carried different rates, with signature debit's higher fees reflecting the higher risk of authenticating transactions with a signature. Observers said the shift would drive up revenue for Visa, and could stem some criticisms from merchants that have complained about the cost of accepting cards.
Separately, the San Francisco payments company's chairman and chief executive, Joseph Saunders, said Wednesday that it expects to raise the acquirer processing fee in July.
The new fees, along with increasing transaction volume driven by the improving economy, gave Visa a bullish view on the coming year, and it reported strong earnings growth for its fiscal second quarter.
Lowering the signature debit rate while increasing the PIN debit rate is a "brilliant" strategy on Visa's part, said Philip Philliou, a managing partner of the payments consulting firm Philliou Selwanes Partners LLC in New York. "Raising PIN debit interchange will presumably increase their profitability as well as the issuer's."
The two-step approach addresses merchants' interchange concerns while potentially generating higher revenue for issuers, said David Parker, a research analyst with Lazard Capital Markets.
"If PIN debit and signature debit are closer, then merchant's can't complain about it," Parker said.
Visa this month changed its debit interchange rates by raising PIN-based transaction costs and lowering signature transactions; both are now 0.95% of each purchase plus 20 cents. The signature debit rate was previously 1.03% plus 15 cents, and PIN was 0.75% plus 17 cents.
A Visa spokesman declined to discuss the specific changes.
(The rates were posted online on the blog VantageViewpoint.)
"Visa Inc. is making a variety of program and interchange modifications to make digital currency even more convenient for consumers and merchants and to facilitate continued growth for Visa and its clients through increased issuance and acceptance," the company said in a statement.
Visa said the overall net effect of such changes is miniscule.
Visa competitor MasterCard Inc. raised its merchant assessment rate this month from 0.095% on gross volume to 0.11%.
"We don't comment on specific pricing actions but we constantly review and evolve our pricing to ensure we remain competitive and are appropriately priced for the value delivered," said Chris Monteiro, a MasterCard spokesman.
During a conference call with analysts Wednesday, Saunders downplayed changes to debit interchange fees.
"I don't think that the trend from signature to PIN is any much different than it's been for quite a while," he said. "While the PIN volume has grown, so has the signature volume and the signature volume is considerably more than the PIN volume."
"It has always been a fact that a merchant can use PIN to any extent that they want," he said. "If the merchant wants to put PIN terminals in then they are more than welcome to do so."
Many large national merchants have upgraded their terminals to process PIN-based transactions, which traditionally are cheaper for merchants, Philliou said.
"If you're looking at where the puck is going," he said, "the opportunity is going towards debit transactions. Certainly Visa is astutely maximizing their pricing options, increasing their revenue potential per transaction for them and their banks."
Raising such fees, for Visa at least, helps cushion larger rebate and incentive costs the company expects this fiscal year as payments volume bounces back, said Scott Valentin, a managing director with FBR Capital Markets.
Visa executives on Wednesday said they expect such incentives as a percentage of gross revenue to be at the higher end of 16% to 17% for its current fiscal year.
Visa projects credit and debit card spending to continue rising this year, giving more credence to speculation the economy is improving and consumers feel better about their financial security.
Visa said Wednesday U.S. card payments volume jumped 12.7%, to $427 billion in the second quarter ended March 31, from a year earlier. That figure has been consistently climbing in recent quarters, but analysts were more heartened by the fact that Visa's U.S. credit card growth, in particular, was positive for the first time since the quarter ended Sept. 30, 2008.
The company's U.S. credit card payments rose 3.4% year over year, to $182 billion.
The recession caused many consumers to migrate from credit to debit cards to avoid wracking up debt. The trend did not have much of an effect on Visa because it is the dominant debit card company domestically.
However, that credit card transactions are rising suggests "consumers are getting more confident and maybe more willing to use" credit, FBR's Valentin said. Much of the increase in credit card payments was generated in "less sexier," nondiscretionary spending categories, such as fuel, discount stores, bill pay and grocery stores, Chief Financial Officer Byron Pollitt said during a conference call with analysts Wednesday. To some that could suggest cardholders are in worse financial shape, using credit in lieu of debit for basic necessities.
Analysts viewed the trend as positive, though, a sign consumers are comfortable using their credit cards again. The trend benefits Visa and its issuers too, helping them generate higher interchange fees from signature credit purchases.
The higher payments volume helped boost Visa's earnings.
Its revenue grew 18.9% year over year, to $1.96 billion for the three months ended March 31.
Net income grew 33%, to $713 million.
Visa said it expects annual revenue growth to come in close to the high end of 11% to 15% for the fiscal year.