In the U.S., Visa Banks on Debit As Credit Growth Goes Negative

Debit cards have been growing faster than credit cards for years now in the United States, but they'll be more important than ever for Visa Inc.'s growth in the near term as wary banks rein in lending. With the weakening economy, what had been slow credit card payment growth went negative shortly after Visa's recently ended fourth quarter. Visa executive chairman and chief executive officer Joseph W. Saunders said at an earnings conference call late Wednesday that aggregate U.S. payment volume was up 10% in the fourth fiscal 2008 quarter ended Sept. 30. Credit payment volume growth had been in the low single digits but trended lower through September, while debit volume was up in the low to mid double digits throughout the quarter. “Since the beginning of October we have experienced additional moderation in volume growth in the U.S.,” Saunders said. “Credit payment volume, which was in the 1-to-2% range for most of the quarter, has turned negative through the first three weeks of October. In contrast, debit payment volume has continued to grow at low double digits.” Furthermore, the number of U.S. credit cards is actually shrinking, Visa data show. In the hour-long call, Saunders and chief financial officer Byron H. Pollitt Jr. emphasized that Visa is pegging its financial forecasts on continued strong debit growth in the U.S. as well as higher growth in both credit and debit internationally, where most of the world's payment green fields can be found. With the economic slowdown, much of that growth depends of Visa cards capturing an ever-increasing share of consumers' so-called non-discretionary purchases such as groceries and gasoline, purchases that consumers more readily put on debit rather than credit cards. More evidence that this fall's global financial earthquake is taking a toll on the payments industry: American Express Co. on Thursday morning said it would cut 7,000 jobs, or 10% of its global workforce, in an effort to save $1.8 billion in 2009. Total fourth-quarter Visa payments volume grew 15% over the prior year to $699 billion. Payments volume jumped 17% for all of fiscal 2008 to $2.7 trillion. Total transactions on Visa's brands?Visa, Interlink, Plus, and Electron?that Visa processed on its networks grew 11% to 9.59 billion in the fourth quarter from 8.65 billion a year earlier. Transaction volume hit 37 billion for all of fiscal 2008, an increase of 13% from 32.7 billion in 2007. Visa's data include numbers for all of its former regions worldwide before they were merged in advance of Visa's initial public stock offering last March except Visa Europe, which remains a bank-owned association and licensee of Visa Inc. Visa reports most other operating data on a quarter-trailing basis. Thus, for the third fiscal quarter ended June 30, Visa had combined U.S. credit and debit payment volume of $423 billion, up 9.8% from $385 billion in 2007's third quarter. U.S. payment transactions grew 11% to 7.66 billion from the year-earlier quarter's 6.90 billion. Transactions on Visa's U.S. debit cards long ago surpassed credit transaction volume, and now debit dollar volume for payments is getting close to credit's?$210 billion in the third quarter for debit versus $213 billion for credit. Those figures reflect respective increases of 15.1% and 5% from $183 billion and $203 billion in fiscal 2007's third quarter. U.S. debit payment transactions grew 14.5% to 5.33 billion in the third quarter from 4.65 billion in the year-earlier period. Credit payment transactions grew 3.7% to 2.33 billion from last year's 2.25 billion. Credit cards outstanding in the U.S. fell 2.9% to 335 million from 345 million in 2007's third quarter while the U.S. debit card base increased 15.2% to 311 million from 270 million. Visa continued to spend heavily on marketing and support incentives meant to encourage issuers to pump out Visa-branded cards and for merchants to encourage Visa transactions (Digital Transactions News, Sept. 19). Incentives grew 38% in the fourth quarter to $299 million from $216 million in fiscal 2007's final quarter. For all of fiscal 2008, Visa spent $1.16 billion on incentives, up 63% from $714 million in 2007. Those incentives represent about 16% of revenues, and Pollitt indicated Visa's incentive spending would remain at the 16% to 17% level in fiscal 2009. With Visa projecting revenue growth of 11% or more, that means incentives could approach $1.3 billion. AmEx, however, said that besides cutting its head count, it would retrench on technology, marketing, and business-development spending and would be “streamlining costs associated with some rewards programs” in order to save about $1 billion in 2009. “Despite these cutbacks, the company plans to continue to make substantial investments in selective growth opportunities during the next year,” AmEx said. MasterCard Inc. is scheduled to report it third-quarter earnings on Monday.