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Interlink Loses More Than Half Its Volume as Durbin Routing Provisions Take Effect
July 25, 2012

The Durbin debit numbers are out, and they aren’t pretty for Visa Inc., the leading debit card player in the U.S. Visa on Wednesday reported that U.S. debit payments volume plummeted 9.8% in the third quarter of fiscal 2012 ended June 30, hitting $266 billion versus $294 billion a year earlier. Visa’s Interlink PIN-debit network absorbed the entire blow, with payment volume falling 54%, according to chief financial officer Byron H. Pollitt.

At a conference calls with stock analysts, Visa’s top brass also predicted that the controversial settlement announced July 13 in a massive group of credit card interchange lawsuits would win court approval despite the opposition voiced by some of the nation’s largest retailers and merchant trade groups.

Interlink’s plunge is a direct result of the Durbin Amendment in 2010’s sweeping Dodd-Frank financial-reform law, which in addition to imposing draconian debit card interchange price controls on issuers outlawed exclusive network arrangements between issuers and networks. Under Federal Reserve rules implementing that part of the amendment beginning April 1, issuers that offered cards only with the Visa logo for signature debit and Interlink for PIN debit had to add access to at least one more PIN network. The idea was to give merchants more transaction-routing choices and lower their interchange expenses.

Before Durbin, about one-third of Visa’s debit volume was Interlink purchases, which implies that about $52 billion in Interlink charge volume went away in the April-to-June quarter. Presumably that volume went to competitors such as MasterCard Inc.’s Maestro network, First Data Corp.’s Star, Discover Financial Services’ Pulse, Fidelity National Information Services Inc.’s NYCE, and smaller electronic funds transfer networks. Interlink’s rivals mounted massive sales drives with issuers in the run up to April 1. Some observers believe the big winner was Maestro, a major debit force overseas but until now only a minor player in the U.S. MasterCard is scheduled to report quarterly earnings Aug. 1.

On the brighter side, Visa executives said their signature-debit business is holding up, growing in the mid single digits percentage-wise in the third quarter, and that the overall decline in debit volume likely has hit bottom and is starting to improve. Visa’s U.S. credit card charge volume also continued its strong run in the third quarter, growing 9.8% to $246 billion on 2.88 billion transactions, up 12.1%. But chairman and chief executive Joseph W. Saunders said Durbin’s impact would be lasting.

“There will be a permanent deterioration in our debit card volume as a result of the Durbin legislation, there’s absolutely no question about it,” Saunders said. “So when we talk about waiting and seeing, we’re kind of waiting to see where it gets to, but I don’t expect to be close to where we were when the whole thing started.”

Visa is looking to bolster debit volumes with a new pricing plan that includes lower variable network charges and its new Fixed Acquirer Network Fee (FANF) that the company says will lower overall acceptance costs for merchants that agree to route transaction volume Visa’s way. FANF is going into effect this month, and Saunders said it would take several months to get a good read on how it’s working.

Part of the new post-Durbin plan also includes more incentives to merchants. Incentives have long been part of Visa and MasterCard’s strategies not only to attract transactions from acquirers and their merchants, but also for issuers to pump out cards with their respective brands. Visa spent a total of $614 million on incentives in the third quarter, up 37% from a year earlier and representing 19% of gross revenues.

While acknowledging that some merchants aren’t happy with the planned $6.6 billion settlement to the 7-year-old credit card interchange cases, no Visa executive on the analyst call mentioned specifically that Wal-Mart Stores Inc., Target Corp. and the leading trade association representing convenience stores all have issued statements against it. But Visa general counsel Josh Floum noted that the settlement was reached with the help of mediators, and that merchants really have only the choice of opting out of the damages portion of the agreement, not the part governing network rules changes and protection for the card networks against future interchange lawsuits. The settlement, which also calls for as much as $1.2 billion in temporary interchange price reductions, needs preliminary and final approvals from Judge John Gleeson of U.S. District Court in Brooklyn, N.Y.

“We are very confident that the court is going to approve this settlement,” Floum said.

Visa is responsible for more than half the damages and has been building up an escrow account for years to cover anticipated losses. The company posted a $1.84 billion net loss for the quarter mainly because it recorded $4.1 billion in litigation expenses. Excluding those costs, Visa reported adjusted net income of $1.1 billion on $2.57 billion in operating revenues, up 10.5% from $2.32 billion a year earlier.

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