Visa Seeks Reconciliation With Merchants As Its Debit Losses Narrow

New Visa Inc. chief executive Charles W. Scharf used his first earnings conference call with analysts Wednesday to offer an olive branch to U.S. merchants. Scharf’s comments came on the heels of an earnings and operational report for fiscal 2013’s first quarter that show strong U.S. Visa credit card growth and a slowdown in the huge losses in its Interlink U.S. PIN-debit network.

As the long-time No. 1 U.S. payment card network, Visa hass been the subject of merchant gripes for decades. Visa mostly shook those off, but merchants landed a square punch on both Visa and MasterCard Inc. with the passage of the Durbin Amendment in 2010’s Dodd-Frank Act that sharply limited debit card interchange and gave them more transaction-routing freedoms. Now merchants are hotly disputing a proposed settlement in a big credit card interchange case that they say protects Visa and MasterCard from future merchant lawsuits, and some national and regional retailers are in the process of assembling a merchant-controlled mobile-payments network called Merchant Customer Exchange (MCX).

Scharf addressed none of those touchy issues in any detail, but he did acknowledge that even though its direct customers are card issuers and merchant acquirers, Visa needs to shore up its relations with merchants. He noted that with the expansion of Square Inc. and similar mobile-payments processors, many small merchants are becoming card acceptors for the first time and are welcoming the opportunity to displace cash.

“I’ve had conversations with plenty of merchants that think we do a great job partnering with them, but obviously, you know, there are an awful lot, which are very vocal, that don’t believe that here in the United States,” said Scharf, a former JPMorgan Chase & Co. senior executive who took over from Joseph W. Saunders in November. “And again, that’s on us to figure out how to change the nature of that relationship. So we need to do a whole lot more.”

Scharf did not offer specifics about what Visa will do, but more face-to-face discussions with merchants may be in the offing. “It starts with engaging them very differently,” he said. “I’m not talking through the courts and through D.C., I’m talking directly. We need to balance their issues with others in our value chain.” He also indicated Visa would be more flexible with its rules.

While Visa has relationship issues, the numbers, apart from U.S. debit, told a mostly positive story for the quarter ended Dec. 31. Net income jumped 26% to $1.29 billion from $1.03 billion in fiscal 2012’s first quarter. Operating revenues grew nearly 12% to $2.85 billion versus $2.55 billion a year earlier.

The VisaNet network processed 14.2 billion transactions globally in the quarter, up 4% year over year from 13.6 billion. In the U.S., total payments volume grew 3% to $544 billion on a 0.2% increase in transactions to 10.6 billion.

But the contrast between credit and debit was stark. U.S. credit payment volume grew almost 11% to $262 billion on 3.12 billion transactions, up just over 11%. U.S. debit, however, continued to slip: payment volume and transactions fell 4% to $282 billion and 7.51 billion, respectively.

The declines are the result of the Durbin Amendment’s network-exclusivity and transaction-routing requirements that took effect last April 1. They spared Visa’s big signature-debit business but induced huge transaction losses for Interlink, the PIN-debit market leader, and big gains for rivals such as MasterCard’s Maestro network. Chief financial officer Byron H. Pollitt said Interlink volume fell 44% in the quarter ended Dec. 31, but that was less than the drops of 48% and 54% in the quarters ending Sept. 30 and June 30, respectively.

With the first anniversary of the routing and exclusivity rules coming up, Pollitt expects only one more quarter of steep declines for Interlink. He also reiterated what Visa has been saying for months, that Interlink has suffered a “significant, permanent transaction loss as a result of the Durbin regulations … there is no way we’re going to get back to where we were before,” Pollitt said.

Asked by an analyst about two new programs Visa instituted in the wake of Durbin, PIN-Authenticated Visa Debit (PAVD) and the Fixed Acquirer Network Fee (FANF), Pollitt said “PAVD is up and operating” but added, “you should think of that at best contributing very modesty to our payment volume growth in U.S. debit.” PAVD can route a PIN-debit transaction to Visa even if the card doesn’t carry the Interlink mark.

Regarding FANF, Pollitt said it so far “seems to be going well,” but he offered no details. FANF, which has been controversial with some acquiring-industry circles, rewards acquirers and merchants with lower variable costs for committing transaction volumes to Visa. Federal authorities are investigating Visa’s new pricing but haven’t announced any actions.