While it reported strong results, Visa Inc. largely sidestepped the top question on most observers' minds: How will it be affected by a potential cap on debit interchange fees?
The answer: We just don't know.
The San Francisco payments network's chief executive, Joseph Saunders, reiterated that stance several times in response to analysts' questions on the subject, which dominated Visa's fiscal third-quarter earnings conference call Wednesday.
Visa has remained mum on the potential financial impact since Congress passed the Dodd-Frank Act, which includes provisions granting the Federal Reserve Board authority to set debit card interchange rates that are "reasonable and proportional" to issuers' costs and prohibiting certain payment network exclusivity requirements.
"There are different things that can happen as a result of the Financial Services Act, and we'll have to see what that means," Saunders told analysts during the call. "I really don't believe in my heart of hearts that it's going to stop the electronic payments from growing in the United States."
"What that means, what form that takes, how that changes our business model is not" something he is "able to specify at this particular point in time," he said.
It's not surprising that Visa has yet to provide specific guidance regarding how its revenue could be affected by the lower interchange rates most observers have predicted. The Fed still has to write specific rules for the regulation and neither Visa, nor its rival MasterCard Inc., actually collect interchange fees.
Those fees go to the banks that issue cards with the Visa or MasterCard logos and make up a much more significant portion of their card business revenue. Bank of America Corp. earlier this month said its global cards business could lose $1.8 billion to $2.3 billion in annual revenue starting in the third quarter of 2011 from the interchange provision, though most analysts say the estimate is likely a worst-case scenario projection.
Network fees charged to issuers and assessment fees charged to merchant acquirers, which are a large part of Visa's revenue, are not included in the provision, which was added to the financial regulatory reform bill by Sen. Richard Durbin, D-Ill.
"The big fear by investors is if banks are getting lower yields on their debit portfolios, do they then pressure Visa into lowering their [network] fees?" said Greg Smith, an analyst with Duncan-Williams Inc. "That's the single biggest fear. It kind of depends on where interchange rates" go.
The law also prohibits payments networks and issuers from requiring that transactions with their cards be routed over a single debit network or multiple networks operated by the same company.
"If that opens up competition, particularly on the PIN debit side," the question becomes "how do some of the other PIN debit networks in the marketplace react," said Jason Kupferberg, an analyst with UBS Securities LLC. That could "have an impact on Visa's pricing or Visa's payment volume, or MasterCard's for that matter."
The other key question is what impact will pricing actions that banks take to recoup lost revenue, such as charging checking account and statement fees, have on debit volume, which has been outpacing credit card purchase volume in recent years.
Potentially, consumers may shift to using credit or cash in response to such actions, said Patricia Hewitt, the director of the debit advisory service at the Maynard, Mass., research firm Mercator Advisory Group Inc. However, lower interchange rates also could prompt merchants who previously did not accept debit cards because of costs to begin doing so, she said.
"I think it is difficult to say whether it is a negative, positive or neutral" for Visa and MasterCard, Hewitt said.
Whatever the impact, Visa likely won't begin to feel it until the fourth quarter of fiscal 2011, Saunders said.
Visa's purchase and transaction volume for debit and credit cards continued increasing in the most recent quarter.
Purchases on Visa debit cards in the U.S. rose 20.5% year over year, to $265 billion, with conversions of issuer card portfolios making up a small portion of the increase. U.S. credit card purchases increased 5.9%, to $204 billion.
The number of card transactions that Visa processed grew 14%, to 11.7 billion. Cross-border volume also grew 17%, a sign that international travel is growing and economic conditions are continuing to improve.
Visa's revenue, which is based on the previous quarter's transaction and purchase volumes, rose 23% from a year earlier, to $2.03 billion. It's net income, however, fell about 2%, to $716 million.
"While future opportunities in the U.S. remain, our growth is increasingly likely to come from outside the U.S. borders regardless of the domestic environment," Saunders said. "Today our non-U.S. revenues make up approximately 40% of our business, and one of our stated 2015 goals is to generate half of our revenues from operations in the rest of the world."
Visa is also focused on expanding its e-commerce and mobile payments capabilities, Saunders said, noting it recently completed the $2 billion acquisition of CyberSource Corp., a Mountain View, Calif., company that provides security and payment gateway products for online merchants.