The Federal Reserve Board’s July deadline for capping debit interchange is just around the corner, but MasterCard Worldwide said it does not expect to feel its effects until at least next year.
Under the Fed’s proposal announced in December, interchange rates for debit cards would be capped at 12 cents per transaction for issuers with more than $10 billion in assets. It is the issuers, not the card brands, that earn revenue from interchange, and many issuers will not change their policies the moment interchange rates are trimmed from the current average of 44 cents.
Many of the changes issuers are considering would be designed to limit consumers’ debit card use, and once that happens MasterCard, which switches transactions between issuers and acquirers, would feel the effects.
Issuers “are looking at reducing the reward levels on their debit card activity,” Ajay Banga, MasterCard president and chief executive, said during a May 3 conference call with analysts to discuss first-quarter earnings.
“They’re looking at fees on debit cards,” he said. “They’re looking at restricting the manner in which debit cards get used, either for large-ticket items because of concerns around fraud losses or at the bottom end for small-ticket items.”
Both Visa Inc. and MasterCard executives have taken harsh stances on the interchange rules. Executives at both companies have pointed to unintended consequences they say ultimately will harm consumers. Each has made lobbying efforts to delay, or ultimately abolish, the financial reform.
Visa already has announced that it will support a two-tiered interchange system to accommodate higher interchange rates for smaller financial institutions (
Exclusivity and routing rules also included in the Fed’s proposal could be a boon for MasterCard in that it could draw traffic away from rival Visa, Banga said.
“If there is a ruling that blows up the exclusivity arrangements that Visa has, that’s a good thing for MasterCard,” says Thomas C. McCrohan, managing director for equity research at Janney Montgomery Scott, LLC. “But there are so many moving parts that I don’t know how anyone could speak with conviction of who is going to win or lose at the end of the day.
The simpler the routing rules, the better, Banga said.
“It’s only if the routing options that come out are somewhat simpler and are limited to having a nonconnected PIN brand along with a signature brand–one in the back, one in the front on a card; I think that is the opportunity,” he said. “I’m looking out and saying, just given the reality of my lower share, that should give me some volume benefit over a period of time.”
On the call with analysts, Banga also discussed recent additions to the company that are designed to diversify MasterCard’s “revenue streams across different kinds of clients.” He highlighted the card brand’s newest board member, Rima Qureshi, senior vice president and business unit head for Telefonaktiebolaget LM, Ericsson’s CDMA Mobile Systems business.
The addition of Qureshi could help MasterCard move ahead in mobile payments, an area that many in the payments industry are focused on. Several banks and vendors are testing technology that would enable consumers to turn their phones into digital wallets usable for payment at the point of sale.
Overall, MasterCard beat analysts’ expectations in its latest quarterly earnings.
MasterCard’s first-quarter profit rose 23.5%, to $562 million from $455 million a year earlier, driven in part by a rise in payments. The card brand’s revenue increased 14.5%, to $1.5 billion from $1.31 billion (
U.S. MasterCard debit card transactions, including those associated with any competing brands whose marks also appears on the cards, totaled 2.28 billion, up 10.1% from 2.07 billion. Sales volume rose 10.7%, to $93 billion from $84 billion.
Outside the U.S., debit transactions totaled 885 million, up 31.3% from 674 million. Sales were up 31.6%, to $50 billion from $38 billion.
U.S. credit and charge card transaction volume totaled 1.37 billion, up 3% from 1.33 billion. Sales were up 4.5%, to $115 billion from $110 billion.
Outside the U.S., credit and charge card transaction volume was up 12.3%, to 3.29 billion from 2.93 billion. Sales totaled $287 billion, up 19.1% from $241 billion.
U.S. locations accepting MasterCard’s cards as of March 31 was 23.6 million; outside the U.S. the total was 8.7 million.
Regionally, purchase volume in the Asia Pacific Middle East and Africa region totaled 1.3 billion, up 17.1% from $1.11 billion; sales were up 30.4%, to $120 billion from $92 billion. In Canada, transaction volume rose 7.1%, to 257 million from 240 million, while sales were up 14.3%, to $24 billion from $21 billion.
In Europe, transaction volume totaled 2.01 billion, up 14.2% from 1.76 billion; sales rose 13.7%, to $158 billion from $139 billion. Latin America transaction volume totaled 605 million, up 24% from 488 million; sales totaled $36 billion, up 33.3% from $27 billion.
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