Visa Inc. (V), the world's largest payments network, posted a 46% increase in fiscal second-quarter profit as it benefited from higher transaction volume and the remeasurement of net-deferred tax liabilities.
The San Francisco-based company said Wednesday that cardholders made 13 billion transactions with their Visa credit and debit cards, up 8% from a year earlier. The dollar volume of payments made also increased 11% to $956 billion.
The results follow a positive quarterly earnings report earlier Wednesday from Visa's smaller rival, MasterCard Inc. (MA), which said its profit rose 21.2% thanks to higher card use and market-share gains in the U.S. debit-card market.
While big banks like Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C) have struggled to increase credit-card loans as consumers avoid carrying balances, the actual use of cards has remained strong because customers continue to ditch cash and checks in favor of plastic.
That has helped Visa and MasterCard, which operate networks that facilitate card transactions for cardholders' and merchants' banks, but do not actually lend or issue cards to consumers. The more transactions routed over their networks, the more revenue Visa and MasterCard can make.
Visa raised its guidance for earnings per share for the year to growth in the "high teens to low twenties," from an earlier forecast of growth in the high teens.
Visa's and MasterCard's shares have risen more than 20% and 21%, respectively, over the last year. Visa's shares were up 2.1% at $124.78 after hours Wednesday. MasterCard's shares closed down 1% at $451.45.
"Our strong financial performance this quarter was fueled by continued growth of U.S. credit products, strong cross-border spending and expansion of Visa's core business in international markets," Joseph Saunders, chairman and chief executive officer of Visa, said in a statement.
Like MasterCard, Visa posted an increase in cross-border volume, which is more lucrative for the companies because they typically carry higher fees and are a barometer of foreign travel. Visa's cross-border volume increased 16%.
Visa posted a profit of $1.29 billion, or $1.91 a share, up from $881 million, or $1.23 a share, a year earlier. Revenue rose 14.8% to $2.58 billion.
Excluding the one-time, noncash benefit, net income was $1.1 billion, or $1.60 a share. The tax remeasurement was related to changes California made to state tax rules, which lowered Visa's overall state tax rate. The adjustment resulted in a benefit of $208 million in its income tax provision.
Visa's results beat analysts' estimates, which projected earnings of $1.51 a share on $2.48 billion in revenue.
Visa and MasterCard have been responding to new rules that took effect in October capping how much large banks can collect from merchants each time a consumer swipes a debit card. The rules, known as the Durbin amendment, take aim at fees called interchange, which are set by Visa and MasterCard but collected by card-issuing banks as revenue.
A separate provision, which took effect in April, requires all banks have at least two unaffiliated processing networks on their debit cards to give merchants a choice over which to route.
MasterCard, which has a significantly smaller share of the U.S. debit-card market, attributed some of its recent gains to the new rules. Its processing capability is equipped on about half of U.S. debit cards, up from 25% before the regulation took effect. Its share of debit transactions that consumers authorized with a personal identification number, or PIN, surpassed 20% last month, up from high single digits last year.
In the past, a bank might have used Visa to process debit-card transactions authorized with a consumer's signature and Visa's Interlink debit network to authorize transactions made with a PIN. Such deals are no longer allowed, meaning that same bank must either add a PIN debit network not operated by Visa, such as MasterCard's Maestro network, to its cards or replace Interlink entirely with a different provider.
The requirement is expected to have a bigger effect on Visa, which had more exclusive arrangements with its bank clients than MasterCard, while potentially giving a slight boost to MasterCard, which has a significantly smaller share in the debit-card market.
Visa has "more debit share to lose," said Darrin Peller, an analyst with Barclays, adding that both companies are "paying a little more attention to...bigger merchants with bigger rebates and incentives."
As part of its post-Durbin strategy, Visa also introduced several fee changes that directly affect merchant acquirers, or companies that contract with merchants to process card payments. The changes involve the addition of a new fixed fee based on merchant size, number of locations and monthly volume, while reducing existing variable fees assessed on each transaction.
The intent is to entice merchants to continuing routing transactions over its network, which should result in a net savings for retailers, Visa has said.
Merchant acquirers are ultimately expected to pass along the fee changes to their retail clients.
Another cloud that looms over the companies is a series of more than 50 lawsuits filed by merchants including Kroger Co. (KR), Payless ShoeSource and Safeway Inc. (SWY) and several trade groups. The suits, which also name several large banks that issue Visa and MasterCard cards, take aim at the so-called swipe fees retailers pay on credit-card transactions.
Visa and MasterCard have been working toward a settlement of the suits, which are set to go to trial in U.S. District Court in Brooklyn in September. Analysts have pegged the value of a possible settlement at $6.5 billion based on recent actions by Visa and MasterCard.
MasterCard took a $770 million pretax charge in the fourth quarter based on progress made in the suits. Visa said in December it was depositing $1.6 billion into a litigation escrow account set up to pay for a settlement, bringing the total in the account to about $4.3 billion.
Executives for both companies have said they wouldn't agree to any long-term cut to credit-card swipe fees, though analysts expect the fees could be reduced temporarily as a result of a settlement. In addition, they also expect Visa and MasterCard to eliminate some of the rules they impose on merchants, including one that prohibits surcharging customers who pay with plastic.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; [email protected]