Visa Inc. fired the first shot in the post-Durbin pricing war, but MasterCard Worldwide is not ready to pull the trigger, at least not yet.
MasterCard on Aug. 3 said it does not plan to rejigger the fees merchants and their banks pay the network across the board for processing card transactions similar to what Visa said it would do last week (
“We’re going to be very thoughtful and very surgical in how we approach the opportunities in PIN and signature debit as it unfolds under Durbin,” Chris McWilton, the president of U.S. markets at MasterCard, said on an earnings conference call.
The payment network’s approach is in line with what many analysts were expecting from MasterCard, given its weak share of the U.S. debit card market and its small number of exclusive network routing deals with banks.
Such deals are illegal under the Durbin amendment, the section of the Dodd-Frank Act that instructed the Federal Reserve Board set debit interchange rates that are “reasonable and proportional” to card issuers’ costs.
Besides lowering the rates, the regulation also requires banks to include at least two unaffiliated processing networks on their cards. That means a debit card that carries Visa’s logo for signature transactions must carry at least one other network not related to Visa for PIN transactions.
Many banks include multiple PIN networks, such as First Data Corp.’s Star and Fidelity National Information Services Inc.’s NYCE, on their debit cards, but many banks also have so-called exclusive deals, most commonly with Visa. Under such arrangements, banks use Visa to process exclusively its branded signature-debit and Interlink PIN-debit transactions, typically in exchange for financial incentives.
Because Visa processes the lion’s share of U.S. debit card transactions and has more banks under exclusive-routing deals than any other card network, it stands to lose the most volume, particularly on the PIN-debit side, under the new rules, analysts say.
Visa could lose 50% to 80% of its PIN-debit volume, according to Eric Grover, a principal with the payments consulting firm Intrepid Ventures and a former Visa executive.
“The battle lines over routing are still unfolding,” McWilton said. “Being the smaller player in U.S. debit, MasterCard is … in a completely different competitive situation. Ours is one of potential upside, not the need to defend a large incumbent position. As a result, we will be looking at strategic, surgical opportunities with issuers, acquirers and merchants to incent new PIN enablement on cards as well as routing to our network.”
The response is a stark contrast to that of Visa, which last week announced that it was introducing a new “network participation fee” that merchant acquirers would have to pay. Acquirers would pay the annual flat fee in monthly installments and pass it along to their merchant clients. Visa intends for the fixed fee to offset decreases to variable transaction fees that acquirers pay, which it is lowering to motivate merchants to continuing routing their transactions over its network.
“What was a positive surprise for the market is that MasterCard went out of their way to make a couple of things clear. One is that they have no interest in starting a pricing war in the U.S. debit market,” Jason Kupferberg, a senior analyst with Jefferies & Co., said in an interview.
MasterCard also plans to support a two-tiered interchange structure so banks under $10 billion in assets, which were exempt from the Durbin amendment’s rate caps, can earn higher rates, McWilton said.
MasterCard’s shares rose as much as 9.4% on Aug. 3 to $326.57 after the company outlined its strategy and reported a 32.8% year-over-year increase in second-quarter net income, which reached $608 million (
Part of the reason why MasterCard lacks pressure to make massive price changes is the economics of PIN debit transactions is lower than that of other transaction types.
Such transactions have positive operating margins but the revenue gained on a per-transaction basis is low, MasterCard’s executives said.
“You may get more volume growth than revenue percentage growth, yet … the cost of processing those transactions incrementally at the margin is very small for our company,” Ajay Banga, MasterCard’s president and chief executive, said during the call.
As a result, MasterCard is “not in the game to go out and buy every PIN transaction we can,” McWilton said.
Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey, says the approach makes sense “given the relatively low revenue yields and likely declining revenue yields in PIN debit.”
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