The Bank Card Networks Dole Out Billions in Incentives To Build Traffic

Visa Inc. and MasterCard Inc. are shelling out ever more dollars to buy issuer loyalty and induce merchants to route transactions onto their networks. A Digital Transactions News analysis shows the two leading payment card networks are on track to spend approximately $6.75 billon on so-called rebates and incentives in 2015, up 15% from $5.86 billion in 2014.

The important role of financial incentives to build revenue-generating transaction traffic was highlighted last week, when news broke that San Antonio, Texas-based USAA Bank, a MasterCard issuer for three decades, would convert its estimated 8 million credit cards and 8.5 million debit cards to the Visa brand next year. “As our primary network, this provides us the opportunity to offer more benefits, including the elimination of foreign transaction fees for all USAA Visa credit cards in 2016,” USAA posted on its Web site.

Neither Visa nor USAA has disclosed numbers, but incentives clearly played a role in the switch by one of MasterCard’s biggest issuers.

“We anticipate a step-up in client incentives in fiscal year 2016 based on renewals completed to date and renewals anticipated in 2016, as well as the conversion of USAA and Costco,” chief financial officer Vasant M. Prabhu said Monday at Visa’s conference call with analysts to review financial results for the company’s fourth quarter of fiscal 2015 ended Sept. 30, according to the Seeking Alpha transcript service. In addition to USAA, Prabhu was referring to another big win for Visa, the pending conversion of Costco Wholesale Corp.’s American Express cobranded card portfolio to the Visa brand and Visa replacing AmEx as the exclusive general-purpose credit card brand accepted at Costco’s U.S. stores.

At MasterCard’s quarterly earnings call last week, chief executive Ajay Banga called USAA “a very good client” and “we feel bad about the fact that we no longer have them,” according to Seeking Alpha. But he added that “we tried our best to pursue that business, but at a point, we lost out. And that’s just the way it is.”

Spokespersons for MasterCard, Visa and USAA did not respond to Digital Transactions News's requests for comment.

The networks report rebates and incentives as contra-revenue items on their earnings statements, meaning they subtract the expense from total revenues produced by transaction fees, assessments and other sources. In recent years, the networks have been spending between 15% and 18% of gross revenues on incentives, which rise as revenues rise.

In fiscal 2015, Visa spent $2.86 billion on rebates and incentives, up 10% from $2.59 billion in fiscal 2014. The company’s annual report for fiscal 2014 says Visa had $12.4 billion in incentive commitments due within one year to more than five years out.

MasterCard, the No. 2 network, generally spends more than Visa on incentives and reported $1.02 billion in such expenditures in the third quarter, up 20% from a year earlier. The company said that for all of 2015, spending would be up by the first quarter’s growth rate, which was 19%. Thus, MasterCard is on track to spend $3.89 billion this year compared with $3.27 billion in 2014.

Payments-industry analyst Gil Luria, managing director at Los Angeles-based Wedbush Securities, says incentives and rebates “are a part of a complicated pricing structure the networks employ with their bank and retailer customers” that often depends on processed volumes and the “preferred deal structure for the particular bank.”

“The incentives are structured to create the highest motivation for the bank and retailer to drive volume through payment cards and especially those issued [on] that particular network,” Luria tells Digital Transactions News by email. “To that end, these incentives work exceptionally well in creating processing volumes for Visa and MasterCard.”

Incentives or rebates of network charges are part of virtually every deal the networks sign with banks, according to Luria, “and were likely part of the deal with USAA as well.” Such deals, however, “have to be considered in the full context of the pricing structure Visa signed with USAA. Although the incentives may ramp up as USAA customers migrate to Visa, we will also see transaction volumes accelerate for Visa as well.”