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MasterCard 2nd Quarter Profit Rises 15.1%; Revenue Misses Estimates

By Andrew R. Johnson MasterCard Inc.'s (MA) second-quarter profit increased 15.1% as cardholder transactions and payments volume continued to grow, though revenue slightly missed expectations. The Purchase, N.Y.-based company said it earned $700 million, or $5.55 per share, up from $608 million, or $4.76 per share, a year earlier. The results included a previously disclosed $20 million pre-tax charge for a pending multi-billion settlement of merchant lawsuits MasterCard, Visa Inc. (V) and numerous banks entered into last month, potentially eliminating an overhang for the companies. Excluding the charge, MasterCard posted a profit of $713 million, or $5.65, beating analysts' estimates. "Though economic uncertainties continued to persist, we experienced solid volume and processed transaction growth in all regions as we are focused on driving our global business to expand the reach of electronic payments," Ajay Banga, chief executive officer of MasterCard, said. While transaction and payments volume continued to increase in the quarter, net revenue increased 9.2% to $1.82 billion. Analysts were expecting on average the company to earn $5.58 per share on revenue of $1.88 billion, according to Thomson Reuters. MasterCard's shares, which closed at $436.57 on Tuesday, were down 2.7% at $425 in pre-open trading Wednesday. Weak U.S. employment figures, declining consumer confidence and economic challenges in Europe, have recently cast a pall over payments processors, which depend on transaction volume for revenue. The U.S. Commerce Department said Tuesday that consumer spending slipped slightly in June, the second straight month of a decline. MasterCard, which generates half of its revenue from foreign countries, has managed to shake off some of those concerns by gaining share in the debit-card market thanks to new rules. The Durbin amendment, a provision of 2010's Dodd-Frank financial overhaul legislation, requires banks that issue debit cards to include multiple, unaffiliated processing networks on their cards. Overall purchase volume on MasterCard cards increased 13% on a local currency basis to $661 billion, a slower growth rate than in the previous quarter. Processed transactions, though, surged 29% to 8.5 billion, on par with the first quarter. Cross-border volume, or payments made in one country with a card issued in another country, increased 17%. Such transactions are more lucrative for the payments networks because they typically carry higher fees. Visa and MasterCard don't lend money or issue cards to consumers; rather, they help process transactions for banks that issue cards and those that work with merchants. Visa previously had exclusive debit-processing relationships with many of its bank clients before the new rules took effect in April. Previously, a bank might have used Visa to process debit-card transactions authorized with a consumer's signature and a separate network Visa owns called Interlink to process debit transactions authorized with a consumer's PIN. Such deals are no longer allowed under the rules, meaning that the same bank must either add a PIN-debit network not operated by Visa to its cards or replace Interlink entirely. MasterCard, long the underdog to Visa in the U.S. debit-card market, in May said it had benefited from the rules because banks were adding its network to their cards to comply with the regulation. The company's network is equipped on about half of U.S. debit cards, up from 25% before the rules took effect, MasterCard said at the time. Visa's U.S. debit-card payments volume declined 9% in the fiscal third quarter in large part due to the new rules, the company said last week. Visa and MasterCard executives have said they don't expect the pending merchant settlement to have a lasting effect on card use, despite a provision that would allow merchants to charge customers an extra fee for paying with a credit card. Under the deal, the payments networks and card-issuing banks agreed to pay retailers $6.6 billion to settle lawsuits dating back to 2005. MasterCard's $20 million charge adds to a $770 million charge it took in the fourth quarter to pay for a potential settlement. Its share of the settlement is $790 million, while Visa is on the hook for $4.4 billion. Merchants alleged Visa, MasterCard and the banks conspired to set fees retailers pay each time a consumer swipes a credit card at arbitrarily high levels. The fees, known as interchange or swipe fees, are set by Visa and MasterCard but collected by card-issuing banks like Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) as revenue. As part of the settlement, Visa and MasterCard agreed to temporarily reduce credit-card interchange fees by an amount equal to $1.2 billion. The deal requires court approval and has sparked opposition from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), as well as two trade groups that are plaintiffs in the suits. They argue the settlement does not address problems they see in how the card companies set interchange fees. Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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