Visa Outlines New Fee Structure To Defend Its Debit Business

As Visa Inc. moves into the post Durbin-era, the debit card market leader plans to offer a fixed network participation fee and reduce its variable processing fee for Visa debit products in the United States. Executives expect the new fee structure will make Visa a more viable alternative to competing PIN-debit networks, which stand to pick up new business from current Visa card issuers as merchants take advantage of network-affiliation and transaction-routing provisions in the Federal Reserve\'s new debit card regulations.

\”We expect the lower fees to help us win debit routing volume and to effectively compete on the issuing side of the business,\” chairman and chief executive Joseph W. Saunders said Wednesday afternoon during Visa\'s quarterly earnings conference call with analysts. \”We now have the clarity needed in the regulatory environment to execute strategies that will allow Visa to compete for transaction routing. The fixed fee is not a fee that sits on top what merchants are paying, but part of the reduction in what merchants will be paying. We are comfortable with our situation.\”

The Fed's rule, mandated by the Durbin Amendment to 2010\'s Dodd-Frank Act, requires debit cards to offer at least two unaffiliated networks by next April. Under exclusive arrangements that will be banned by Durbin, many debit issuers\' cards currently offer only the Visa brand for signature debit purchases and the Visa-owned Interlink network for PIN-debit. The rule is intended to provide merchants with the choice of routing debit transactions made with Visa or MasterCard branded cards over a lower-cost network.

Visa expects debit volume to decline in its fiscal year that begins Oct. 1, along with debit revenues, once the new transaction routing rule fully kicks in. \”We expect some loss of debit routing volume in fiscal 2012, but expect strategies in place will help us begin seeing growth from that fiscal 2012 baseline in fiscal 2013,\” said chief financial officer Byron H. Pollitt Jr. \”Our strategies aim to address the new rule of offering at least two unaffiliated networks on debit cards.\”

Saunders added that more details about the new pricing and Visa\'s debit strategies would be forthcoming over the next several months. He also said Visa has no plans to extend the new pricing model outside the U.S.

U.S. debit card payment volume hit $295 billion during fiscal 2011\'s third quarter ended June 30, up 10.9% from $266 billion a year earlier. Continuing its recovery, Visa\'s U.S. credit card payment volume totaled $224 billion, up 9.8% from $204 billion in 2010\'s third quarter. Cross border volume grew 14%.

Transactions processed during the third quarter totaled 13 billion, up 8% from the second quarter and 11% from the same period a year earlier. Volume through Visa\'s CyberSource division, which caters primarily to e-commerce merchants, totaled 1 billion transactions during the quarter.

In discussing Visa\'s other business lines, Saunders says plans are in the works to eventually overlay a virtual Visa prepaid account on the Fundamo platform. Visa closed its acquisition of Fundamo, a provider of mobile financial services, in June.