Durbin Begins to Bite at Visa As Debit Growth Slows in the Latest Quarter

While acknowledging that federal pricing regulations are crimping growth in its debit card business, Visa Inc. late on Wednesday presented an upbeat report to investors that stressed new ventures like its recently introduced digital wallet, V.me. Separately, the world’s largest card network also unveiled new tools to help client banks roll out mobile-banking services for consumers.

Visa chief executive Joseph W. Saunders also said the company will hold firm on credit card pricing in the face of pending litigation brought by merchant groups against credit card interchange and naming Visa, MasterCard Inc., and several major banks as defendants. “We are unwilling to agree to any significant or long-term credit-interchange rate reduction,” Saunders told stock analysts during a conference call to discuss Visa’s fiscal first-quarter results.

While this sentiment echoed a statement recently made by Ajay Banga, Saunders’s counterpart at rival MasterCard, Saunders sounded a conciliatory tone about the litigation, allowing that the likelihood of a settlement might be rising. Visa now has placed $4.3 billion in an escrow account against a possible settlement of the case, which has been brewing since 2005 and is set for trial in September in federal court in Brooklyn, N.Y. MasterCard and Visa have liability-sharing agreements with the banks, with MasterCard itself on the hook for 12% of damages awarded. That implies a possible settlement of $6.4 billion on a pre-tax basis.

Saunders conceded that the Durbin Amendment, which took effect Oct. 1 and cuts debit card interchange roughly in half for issuers with more than $10 billion in assets, is slowing growth in Visa’s debit card business. “Deceleration in the first quarter was an early sign of this impact,” Saunders said, brought on by issuers’ elimination of rewards for debit programs and cutting back on debit marketing. But Visa expected the slowdown and expects the worst impact to be absorbed this year, with faster-paced growth resuming in 2013, Saunders reminded his audience.

Also hurting the business, he said, was a decision by an unnamed “major financial institution” to remove the Interlink brand from its cards. Owned by Visa, Interlink is one of the largest U.S. PIN-debit networks. The issuer, Saunders said, was acting in response to a Durbin routing rule that requires issuers by April 1 to have at least two unaffiliated debit-network brands on their cards.

But Saunders added that Visa is pursuing Interlink agreements with other banks that currently feature competing brands and is close to signing an untold number of them. And “there is no other major issuer that has Interlink on the back of the card that is contemplating taking it off,” Saunders assured the analysts.

In response to the routing rule, Visa said last year it has the capability to process PIN transactions on its signature-debit system and will offer that capability to issuers. It is also spending more lavishly on so-called network incentives to issuers and merchants to stick with Visa. That sum grew 19% in the quarter year-over-year to $481 million. Also, last summer, Visa introduced a fixed network participation fee and reduced a variable processing fee for U.S. debit cards in a bid to make the network more appealing to merchants.

Visa’s U.S. debit payments volume in the quarter, which ended Dec. 31, grew 5.4% year over year to $292 billion. By contrast, volume for the quarter ended Sept. 30, just before Durbin took effect, grew 8.1% year-over-year to $288 billion. U.S. credit card payment volume, which is not affected by Durbin, grew 9.6% to $237 billion in the latest quarter. Credit payment volume had increased 10.3% to $229 billion in the quarter ended Sept. 30.

On a happier note, Saunders lauded V.me, Visa’s entry in the increasingly  competitive digital-wallet wars, calling the new product “a top priority for the organization.” The e-wallet is expected to launch early this year and in its first interation will allow consumers to store cards from any network, not just Visa, for online transactions. Contactless capability, which could enable near-field communication (NFC) for in-store mobile payments, is expected to follow later in the year.

Saunders told analysts on the call that Visa will expand a V.me pilot “in the coming weeks” to include more users as well as “a few brand-name merchants.” The network is also in talks with another 100 merchants and a number of issuers about the product and is integrating it into an online gateway offered by CyberSource, a Visa unit, he said.

In related news, Visa announced on Wednesday a deal with Monitise PLC, a U.K.-based mobile technology platform, that will enable financial institutions to more readily offer account balances, alerts, and funds transfers on customers’ handsets. The service, which works on any mobile phone, is being offered through Visa DPS, the company’s issuer-processing operation. In development are such services as remote check deposit, NFC payments, and support for V.me, Visa said.