Visa Inc. may begin to see bottom-line effects from pending debit interchange regulations as early as next summer, Joseph Saunders, Visa chairman and CEO, revealed to analysts July 28 during a conference call to discuss quarterly results.
Though Saunders insisted it is too early to predict the specific effects from the Federal Reserve Board’s new task of setting debit-interchange rates under the financial-reform bill President Obama signed into law last week, he said any impact would not surface until the quarter ended Sept. 30, 2011, and it likely would be “modest.”
The legislation calls for the Fed to set “reasonable and proportional” debit-interchange rates, which would go into effect 12 months after the law’s enactment. Observers speculate an anticipated reduction in the rates would cut banks’ debit revenues, potentially causing institutions to push card networks to renegotiate debit card transaction-processing deals.
Asked whether Visa is feeling “pressure” from banks to cut transaction-processing fees, Saunders said the legislation “probably exacerbates” existing pressure from banks seeking lower fees, but he declined to be more specific.
The new legislation also requires issuers to ensure that merchants have more than one PIN-debit payment network option for routing transactions, which could affect Visa in cases where issuers have exclusive debit-network arrangements (
Pressed by an analyst to address the possibility that Visa’s Interlink PIN-debit network could suffer “pricing pressure” or other negative effects if issuers adopt additional networks, Saunders said it is too early to tell.
“We have a PIN-debit business and a signature-debit business, and maybe there’s less distinction [after the new rules take effect] between the two, maybe there isn’t,” Saunders said.
Saunders also expressed doubt about the feasibility of a provision in the new law that excludes issuers with assets of less than $10 billion, noting that “having a dual price structure would be difficult, if not impossible” to maintain.
Visa’s chief also disclosed to analysts that the Department of Justice may sue the company over its policies barring merchants from surcharging customers who pay with credit cards. “The department has indicated that it is considering filing a civil lawsuit challenging rules prohibiting surcharging on credit and differential discounting between networks, similar to the claims that have been included within the merchant interchange litigation that’s been pending since 2005,” Saunders said.
Visa hopes to “proactively address” concerns covered in the legislation without triggering further litigation or payment of monetary damages, he added.
Visa’s earnings for the quarter ended June 30 exceeded analysts’ expectations.
Noting “it will take some time for the regulatory headwinds to abate,” Sanjay Sakhrani, an analyst for New York-based Keefe, Bruyette & Woods wrote in a July 29 report that Visa’s long-term profit forecast remains positive.
The company’s “fundamentals were strong even though [the] June spend [total] was generally softer than May,” Bruce Harting, an analyst with Barclays Capital, wrote in a June 29 report.
Visa reported net income of $716 million for its fiscal third quarter, down 1.8% from $729 million a year earlier. Net operating revenue totaled $2.03 billion, up 23% from $1.65 billion, driven by growth in data-processing and international transaction revenue, the company said.
Total operating expenses rose 8.3%, to $892 million from $824 million. This year’s quarter total included higher advertising and marketing expenses tied to Visa’s sponsorship of soccer’s World Cup, company officials noted.
Visa also reported increases globally in transaction activity initiated with its cards during the quarter (
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