May. 3, 2012
Visa Inc.’s pricing plans for merchant acquirers in the wake of the Durbin Amendment have generated controversy in the acquiring industry, and now they’re attracting scrutiny from the U.S. Department of Justice, the leading payment card network disclosed on Wednesday.
Visa said in a regulatory filing that the DoJ’s Antitrust Division on March 13 issued a so-called civil investigative demand for documents and information about PIN debit and Visa’s new Fixed Acquirer Network Fee, or FANF. The inquiry involves possible violations of the Sherman Antitrust Act. Visa said it met twice with division officials in March and provided materials.
“We are confident our actions are appropriate and that our response to the DoJ supports that,” Visa chairman and chief executive Joseph W. Saunders told analysts Wednesday during the company’s earnings conference call for fiscal 2012’s second quarter ended March 31. “But in a business as complex as ours, the department’s request is not unexpected,” Saunders said, according to the Seeking Alpha transcript service. “Visa has received four other requests for information from the department since 2007, each of which took from nine to almost 24 months to complete. All have been resolved with our full cooperation.”
The DoJ’s request is just one more effect of the Federal Reserve Board’s rule implementing the Durbin Amendment in 2010’s Dodd-Frank Act that imposed debit card price controls on big banks and gave merchants more freedom to route debit card transactions to their preferred networks. In response, Visa, whose U.S. debit market leadership is threatened by the new regulations, reduced some variable charges and introduced the FANF, which it said would lower many acquirers’ total costs. But some acquiring executives, when they first got details about Visa’s pricing schedule a few months ago, questioned whether that would happen. How the new plan will work in the real world won’t be known for months because acquirers don’t actually start collecting the FANF until July 1. The Electronic Transactions Association trade group has asked Visa to delay it.
The Durbin Amendment’s price controls, which affect debit card issuers with more than $10 billion in assets, took effect Oct. 1. The regulations also include a ban on network exclusivity as well as the new routing provisions, which affect all issuers and took effect April 1. Observers see Visa having the most to lose from the exclusivity ban because many issuers offered debit cards with only the Visa brand for signature debit and Visa’s Interlink network for point-of-sale PIN debit. Now debit cards must offer at least one unaffiliated network, which is proving to be a windfall for MasterCard Inc.’s Maestro and other PIN-debit networks looking to pick up new issuer-members.
In fact, Saunders said, “Interlink is bearing the brunt of the regulatory impact,” according to Seeking Alpha. Between April 1 and April 28, as the compliance deadline kicked in, “Interlink payment volume has experienced notable deterioration,” he said. Visa’s signature debit volume, in contrast, saw a “modest” but slowing payment volume growth in the quarter ended March 31, mainly because issuers cut debit card rewards programs.
Saunders said Visa anticipated how Durbin would affect the company’s debit business and expects the Fed’s regulations to have their greatest impact in the current (third) fiscal quarter. After that he expects Visa’s debit business will begin to rebound. He noted that Interlink could pick up PIN-debit business from competitors and that Visa has maintained all of its major signature-debit relationships. Fourteen of 15 signature issuers have agreements lasting until at least fiscal 2015, and the majority go even longer, he said.
Visa’s total U.S. debit card purchase volume grew only 2.2% in the second quarter, hitting $284 billion versus $278 billion in fiscal 2011’s second quarter when volume grew 13%. Debit purchase transactions in fiscal 2012’s second quarter totaled 7.47 billion, up 2.4% from a year earlier.
In contrast, credit card purchase volume grew 11.9% to $223 billion from $199 billion a year earlier. Credit purchase transactions increased 13.5% to 2.59 billion.
Visa’s prolific profit machine still produced in the second quarter despite the sputtering in U.S. debit. The company reported net income of $1.29 billion, up 47% from $881 million a year earlier, on operating revenues of $2.58 billion, up nearly 15%.
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