Buoyed by a reduction in loan-loss reserves and a modest increase in credit and debit card purchase volume, U.S. Bancorp on July 20 said second-quarter net income for its payments services unit doubled from the same period last year.
The bank also said it is bracing for cuts in debit card revenue resulting from the Federal Reserve Board’s final debit-interchange rule, although its merchant-processing unit may see some boosts in revenue.
Payment-services net income for the quarter ended June 30 rose 100%, to $364 million from $182 million a year earlier. Total net revenue was $1.16 billion, up 3.6% from $1.12 billion.
The Minneapolis-based bank’s provision for loan losses declined sharply, to $89 million from $358 million, as account defaults diminished. The credit card charge-off rate for the quarter was 5.45%, down 234 basis points from 7.79%. Average credit card loans held at the end of the quarter totaled $15.8 billion, down 3.1% from $16.3 billion a year earlier.
Credit and debit card revenue during the quarter increased 7.5%, to $286 million from $266 million.
Retail credit card charge volume was $12.5 million, up 8.7% from $11.5 million. Debit card transaction volume during the quarter was $11.7 million, up 10.4% from $10.6 million a year ago.
Corporate credit card charge volume was $12.2 million, up 9.9% from $11.1 million. Corporate payment products revenue grew 3.9%, to $185 million from $178 million.
Merchant-processing services revenue through U.S. Bank’s Elavon subsidiary rose 5.9%, to $339 million from $320 million.
Sales volume from merchant-processing services was $72.7 million, up 11.8% from $65 million a year earlier. U.S. Bank processed 803.5 million merchant transactions, up 8.2% from 742.7 million.
Revenue from ATM-processing services rose 5.6% to $114 million from $108 million.
While the issuer’s overall credit card receivables have declined this year similar to the rest of the industry, the level is in line with expectations given “the charge-offs finally going away and our reticence to get into the game of trying to outprice ourselves for the next new customer,” Richard Davis, U.S. Bank president and CEO, said during a conference call with analysts to discuss the quarter’s performance.
Asked how new debit-interchange pricing rules will affect the bottom line beginning later this year, Andy Cecere, U.S. Bank chief financial officer, called the Fed’s final rule “astonishing,” saying he expects the bank’s debit-fee revenue to decline by about $300 million on an annual basis, beginning during the fourth quarter.
The Fed’s rule, required by legislation passed last year, goes into effect Oct. 1 (see published final rule). http://www.federalregister.gov/articles/2011/07/20/2011-16861/debit-card-interchange-fees-and-routing
U.S. Bank expects to find ways to offset “approximately one-third to one-half” of those debit-revenue losses “by modifying our checking account products and pricing,” including making changes to checking and debit products, Cecere said.
Davis told analysts the company has “reconstructed” its checking products, requiring customers to expand their relationships and deposits with the bank to offset monthly fees.
Providing a clue to U.S. Bank’s plans to further offset some of its lost debit revenue, Davis said there could be an additional debit-related “cost to merchants over the course of time as we understand how to unbundle what the (the Fed’s final rule) really means and the cost of providing fraud and immediate guarantees and immediate credit and all of that.” He provided no further specifics.
Because the Fed’s final rule caused U.S. Bank and its competitors to reduce or eliminate debit-rewards programs, there may be a cardholder shift “to people using their credit cards more often, particularly for the rewards and for those who typically pay off their card every month and don’t revolve balances anyway,” Davis noted.
Davis also foresees “some pickup” in revenues on the merchant-acquiring side resulting from the new Fed rule because acquirers are not required to pass on all of the reduction in debit interchange to merchant clients.
“It’s not as big a number as you might think, but being one of the largest merchant processors and providers in the country, we do have the benefit of assessing exactly where these payments will go and how they will be allocated back down to the merchants,” Davis said.
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