Digital Transactions Authoritative, insightful and timely information for payments professionals
MasterCard Inc. reported second-quarter results on Wednesday that indicate continuing gains in its debit card business, and in PIN debit in particular, in the wake of federal debit regulations that forced issuers to add new networks to the cards they issue. MasterCard’s gains in debit come in the wake of a big debit- volume loss reported last week by rival Visa Inc.
The nation’s second-largest card network also reported it took a further pretax charge of $20 million to cover its liability in the credit card interchange litigation that yielded a proposed settlement last month. Together with funds set aside earlier, this brings the company’s total share of the financial settlement to $790 million.
Overall, MasterCard saw its U.S. debit dollar volume climb 14% to $149 billion in the quarter compared to the same period last year. Of this total, $111 billion represented point-of-sale transactions, with the remainder accounted for by ATM and other cash transactions. Purchase transactions on debit totaled 2.82 billion, up 14%.
While not breaking out PIN debit from signature-debit activity, MasterCard is clearly benefiting from the new regulations, which stem from the Durbin Amendment to the 2010 Dodd-Frank Act. Besides capping debit card interchange for issuers, the new rules include a requirement that banks use at least two unaffiliated networks for the cards they issue. The requirement, which took effect April 1 and is intended to give retailers more choice in routing debit transactions, forced many banks that had used a Visa-Interlink combination on their debit cards to add other PIN debit networks. In large part because of the new rule, Visa said volume on its Interlink PIN-debit network plunged 54%, or an estimated $52 billion, in the quarter ended June 30.
The result appears to be a windfall for MasterCard. “We feel really good about U.S. PIN debit in particular, even though we don’t yet know how these volumes will shake out,” said MasterCard president and chief executive Ajay Banga during a Wednesday morning conference call with analysts. Banga referred to a “robust sales pipeline” in debit with “significant renewals” and new business.
The new volume may also have come as a result of beefed-up incentives offered to both issuers and merchants. MasterCard’s expense for rebates and incentives ballooned 24% in the quarter, to $661 million versus $534 million a year ago. Addressing this number, Banga took pains to say the company is using inducements “surgically and sensibly” to win more volume. “We haven’t changed our strategy” in the wake of the new routing rules, he said, adding, “[We] do not try and apply rebates and incentives in a broad way and not in the position of trying to protect a pre-regulatory-change market share.”
On the proposed settlement of the 7-year-old merchant litigation over credit card interchange, Banga said the agreement allowing merchants to apply surcharges, within limits, to credit card transactions was a necessary concession by the card networks. “The merchants were very clear that, without that, there is no conversation,” he said. Under the terms of the settlement proposal, Visa and MasterCard agreed to modify their rules to allow merchants for the first time to recover credit card transaction costs through surcharges. The deal also calls for the networks and about a dozen defendant banks to pay more than $7 billion to settle merchant damage claims and refund about eight months’ worth of interchange.
Banga said he wasn’t thrilled with the surcharge agreement, calling the upcharges a source of “friction” for electronic payments, but said the surcharge cap and other restrictions, including a required notice to consumers, will help. “It’s friction, and I don’t like the friction, but I’m trying to minimize it with as much lubricant as I can put into the system,” he said. Both Banga and MasterCard general counsel Noah Hanft said they expect the settlement agreement to be approved by the U.S. District Court for the Eastern District of New York.
For the quarter, MasterCard reported revenue of $1.82 billion, up 9%, and net income of $700 million. While the profit number is up a healthy 15% over the year-ago quarter, revenue fell short of analysts’ expectations, sending MasterCard’s shares down 2% for the day, to $427.20.
