Visa Inc. plans revisit its incentive agreements with issuing banks after the Federal Reserve Board finalizes its capped rate for debit card interchange this summer, executives for the card brand told analysts May 5 during a conference call to discuss fiscal second-quarter earnings.
Doing so would alleviate pain some issuers will feel over reduced interchange revenue. Under the current Fed proposal, interchange rates for debit cards would be capped at 12 cents per transaction for issuers with more than $10 billion of assets. The current average is 44 cents.
“We will naturally, at our impetus, want to revisit a number of those contracts to make sure that the incentives are structured in a way that makes sense, given the legal environment that we will be under post-Durbin,” Byron Pollitt, Visa chief financial officer, said during the call.
The Durbin amendment to the Dodd-Frank Act instructed the Fed to set “reasonable and proportional” debit card interchange rates, which would go into effect July 21. Congressional action, however, could delay implementation, and the Fed also might change the cap in its final rule, which is still pending.
“We are going to want to … adjust the incentives so [they benefit] both us and the financial institution,” Pollitt said. The extent to which those incentives are going to be adjusted depends on whether the Fed changes its capped rate, he said.
On May 5, Visa said its profits for the quarter that ended March 31 rose 23.6%, to $881 million, from the same period a year earlier. The company’s net operating revenue increased 14.8%, to $2.25 billion (
Analysts expected solid results from Visa, which they said benefits from the same trends that lifted MasterCard Inc.’s earnings (
Both Visa and MasterCard have stood strong on their concerns about the unintended consequences of the Durbin amendment. Each has been vocal about the potential harmful impact on consumers.
Visa, however, also has been proactive in adapting to the changing payments landscape. The company has said it will support a two-tiered interchange system to accommodate higher interchange rates for smaller financial institutions (
Visa’s chairman and chief executive, Joseph Saunders, highlighted several reasons for the company’s successful second quarter: Data and fraud-protection initiatives at Visa subsidiary CyberSource Corp., a recent deal with U.S. Bancorp, and deals with Kroger Co. and The Gap Inc.
The Gap deal allows the retailer to send its shoppers “real-time, location-based discounts and promotions” as text messages after they enroll in the Gap Mobile 4 U program, Saunders said.
Industry watchers say they expect more announcements on similar promotions.
“The card brands have a challenge–they have been increasingly viewed as more pro-bank, and they are trying to show the merchant community and regulators that they offer merchants value and consumers value in the face of rising interchange,” says James Van Dyke, president of Javelin Strategy and Research in Pleasanton, Calif.
Saunders also hinted at an announcement later this month that would involve its “global e-commerce and mobile strategy,” hot topics in the payments industry.
Not everyone, however, was impressed.
“The last time they hyped something was RightCliq,” an e-commerce hub, “and boy is that a cutesy little thing, which is probably $200 million not well spent,” says Wedbush analyst Gil B. Luria. “I’m not holding my breath.”
Overall, Saunders said no matter the outcome of Durbin, Visa will be fine.
“Whether the legislation gets delayed or not, we still expect to deliver revenue growth,” he said.
What do you think about this? Send us your feedback.
