2nd UPDATE: Visa Profit Surges; Justice Probes Debit Strategy

Date : 05/02/2012 @ 7:17PM
Source : Dow Jones News
Stock : JP Morgan Chase & Co. (JPM)
Quote : 111.42  2.1 (1.92%) @ 3:14PM
JP Morgan Chase share price Chart

2nd UPDATE: Visa Profit Surges; Justice Probes Debit Strategy

Visa (NYSE:V)
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The U.S. Justice Department is probing Visa Inc.'s (V) fee changes made in response to new federal regulations that affect debit-card processing, which are already eating into the card giant's dominant debit-market share.

The DOJ requested information from Visa about the company's PIN-debit business and "elements of our new debit strategies," including a new fixed fee it is now charging merchant banks, Chairman and Chief Executive Officer Joseph Saunders said Wednesday during an earnings conference call.

The request came in the form of a "civil investigative demand," a process antitrust regulators use to obtain information from companies.

"In March, we met with the department twice and provided materials in response" to the request, Saunders said. "We are confident our actions are appropriate and that our response to the DOJ supports that."

A Justice Department spokesman was not immediately available for comment.

Visa's shares were down 1.9% at $119.88 in after-hours trading but had been up more than 2% on positive fiscal second-quarter results.

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. But the company said the effects of new debit-card regulations, known as the Durbin amendment, are starting to affect some of its processing volume.

Visa said its U.S. debit payment volumes growth slowed in the most recent quarter and continued to do so in April.

The new debit rules were part of 2010's Dodd-Frank Act and sparked a raging debate between the payments industry, including card processors and banks, and merchants, which pay fees every time a consumer swipes a card.

One provision of the regulation cut nearly in half fees known as interchange that big banks like Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) can charge merchants every time a consumer uses a debit card. That rule took effect in October. Visa and MasterCard set the interchange fees that their bank partners receive 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.

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 the 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 provision was expected to have a bigger impact on Visa, which had more exclusive relationships with banks, than on MasterCard, which has been the underdog in the U.S. debit-card market.

Interlink saw negative payment volume in each month of the most recent quarter and experienced "notable deterioration" in April, Saunders said.

However, Saunders noted that Interlink contributed less than 10% of Visa's U.S. debit revenue and about 2% of Visa's overall revenue.

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 starting April 1 based on merchant size, number of locations and monthly volume, while reducing existing variable fees assessed on each transaction.

The Electronic Transactions Association, a trade group that represents merchant acquirers and other payments companies, sent a letter to Visa earlier this year blasting the plans, arguing Visa did not give enough advanced notice of the specific changes.

Merchant acquirers often pass along price changes by Visa and MasterCard to their retailer clients, which means the retailers ultimately could bear the brunt of any price increase or benefit from a price decrease.

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.

"There hasn't been a lot of reaction to" the price changes, Saunders said, adding that the company isn't "doing this with the intent of raising prices."

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.

Saunders did not say specifically what the Justice Department is looking at in relation to its strategy but said the request came from the agency's antitrust division. The possible scenarios that could result from the agency's probe are built into Visa's guidance, Saunders said.

As for its earnings report, 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 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 tied to the remeasurement of net deferred tax liabilities, 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.

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, which said its profit rose 21.2% thanks to higher card use and market-share gains in the U.S. debit-card market.

The companies 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's and MasterCard's shares have risen more than 20% and 21%, respectively, over the last year.

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%.

-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; andrew.r.johnson@dowjones.com

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