Hit by Durbin, Visa’s U.S. Debit Volume Shrinks by Double Digits in April

Visa Inc. has been saying for months that the Durbin Amendment’s transaction-routing and network-exclusivity rules, which took effect April 1, would take a bite out of its debit business. Gash might be a better word for the amendment’s initial effects, especially on the Visa-owned Interlink PIN-debit network.

The No. 1 payment network reported Wednesday that U.S. debit payment volume declined 12% in April versus April 2011 and slipped 8% May 1-28 against the year earlier period. In contrast, U.S. credit card payment volume grew 8% in April and 10% in May’s first four weeks.

Visa did not give actual volume figures, but chief financial officer Byron H. Pollitt told attendees at a New York investor conference on Wednesday that Visa’s signature-debit business “moved through the legislative change in very good shape,” with “strong mid-single-digit growth, and we would expect that to continue.”

It’s a different story at Interlink, which was particularly vulnerable to the Durbin Amendment’s routing and exclusivity provisions that became effective last month under Federal Reserve rules implementing them. Durbin outlaws debit cards that give merchants access only to affiliated networks, such as Visa for signature debit and Interlink for point-of-sale PIN debit. Most debit card issuers responded by adding a second, unaffiliated PIN-debit network, producing a windfall for Interlink’s competitors such as MasterCard Inc.’s Maestro network. “That’s where we have taken the brunt of the transactional loss,” said Pollitt, noting that slightly more than half of Visa’s debit cards had borne only the Visa/Interlink marks before the new regulations took effect.

Pollitt predicted at the Cowen & Co. 40th Annual Technology Media and Telecom Conference that the “most significant deterioration in transaction volume” would come in the third fiscal quarter that ends June 30. After that he expects debit volumes to begin recovering, though Interlink will still shrink.

Bright spots for Visa include the international debit market, which is growing in the 20% to 30% range, according to Pollitt. Another is U.S. credit, which is getting a boost from a recovery in many consumers’ finances and new attention from banks, especially big ones whose debit card interchange has been cut by about half by the Durbin Amendment price controls that took effect last October.

Pollitt also briefly explained Visa’s new U.S. pricing plan for merchant acquirers (which typically pass such costs through to their merchants) now that the Durbin regulations are in place. The plan replaces pre-Durbin variable network pricing, which is separate from interchange, and has three parts: a so-called Fixed Acquirer Network Fee, or FANF; reduced variable transaction rates; and incentives for merchants that commit to meeting certain Visa card transaction thresholds.

“The first feedback we got to the change in our pricing approach was the merchants didn’t understand it,” said Pollitt when the conference moderator asked about initial merchant reaction. While some merchants and acquirers have expressed fears that their Visa acceptance costs will rise under the new system, Pollitt says the overall effect is otherwise. “When you put the three together, the FANF, the lower variable cost and the incentives, that actually resulted in a net price decrease,” he said. “For us, at comparable volumes for the prior year, it was a $100 million decision.” He added that “a substantial number of merchants” have committed to volume thresholds to lower their costs.

The U.S. Department of Justice is investigating the antitrust implications of Visa’s new pricing and related debit issues, but Pollitt expressed little fear that they won’t pass muster. He noted that the DoJ has probed Visa four times on other matters. Visa has met with DoJ officials twice recently and sends reports every two weeks about its decreasing share of the U.S. debit market because of Durbin, according to Pollitt. “We will permanently surrender market share,” he said.