“Selective” Incentives Will Help Steer Debit Volume to MasterCard, Banga Says

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MasterCard Inc.’s chief executive on Wednesday said the network would continue to be “strategic” and “surgical” and “selective” as it seeks new transaction volume in the newly regulated U.S. debit card market. Big processor First Data Corp., meanwhile, reported the biggest increase in transaction volume by issuers in its Star PIN-debit network in at least seven quarters.

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At a conference call with analysts to discuss the No. 2 payment card network’s third-quarter earnings, MasterCard president and chief executive Ajay Banga said his company is offering select merchants and merchant acquirers incentives to direct debit card transactions MasterCard’s way. “We are in a completely different competitive situation from others in the debit space and do not have the need to defend a large incumbent position,” said Banga in reference to market leader Visa Inc.

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Visa owns the Interlink PIN-debit network and has many exclusive relationships with debit card issuers in which their cards have only the Visa brand for signature debit and Visa’s Interlink mark for point-of-sale PIN-debit. Such exclusive relationships are now illegal under the Durbin Amendment to 2010’s Dodd-Frank Act, which on Oct. 1 imposed 40%-plus cuts in debit card interchange for issuers with more than $10 billion in assets.

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Debit issuers of all sizes must now offer at least one unaffiliated network on their cards, and networks and issuers are banned from interfering with merchants’ transaction-routing choices. That means MasterCard stands to gain a windfall because, in contrast to Visa, it has few exclusive relationships with issuers whose cards offer only MasterCard for signature debit and MasterCard’s Maestro network for PIN debit. But the company will have to pay for it. “Merchants, issuers, and acquirers continue to seek incentives for routing preference,” Banga said. “We will be strategic and selective when we consider situations where we are willing to pay [incentives].”

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Despite repeated questions from analysts, Banga would not identify any specific recipients of MasterCard’s incentives or give details about its tactics, but he said MasterCard would seek “strategic, surgical opportunities” in pursing a four-point debit strategy. Those points are: retaining its existing debit programs, getting Maestro’s brand onto the back of as many debit cards as possible with issuers seeking an unaffiliated PIN network, persuading more banks to shift their debit card business to MasterCard as SunTrust, Sovereign, and now Huntington have done recently, and encouraging certain merchants and acquirers to route debit transactions MasterCard’s way.

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But Banga did take the opportunity to deflate Visa’s debit strategy. Visa reported last week that its VisaNet network can process both signature and PIN-debit transactions, which means Visa could still generate PIN-debit traffic even if a debit card does not have the Interlink brand. Visa apparently has had such capability for quite some time but until now has drawn little attention to it. Asked if MasterCard planned to route PIN traffic on signature- debit rails, Banga said, “I’m not going to tell you what plans we have, but I’ll tell you this: We can obviously do that.” In fact, he said, Maestro in Europe processes that way.

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MasterCard’s transaction machine kicked into high gear in the third quarter, the last one before debit interchange price controls took effect. Recovering from some issuer losses and benefiting from the addition of SunTrust’s cards, debit card purchase transactions totaled 2.49 billion, up 21% from 2.05 billion in 2010’s third quarter. Debit card charge volume jumped 23% to $97 billion from $79 billion a year earlier when volume slipped nearly 3%.

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Purchase volume on MasterCard credit cards increased nearly 7% to $130 billion from $122 billion in 2010’s third quarter on 1.55 billion transactions, up 4% from 1.49 billion. Total processed credit and debit transactions worldwide grew nearly 21% to 7 billion, MasterCard’s best quarterly performance since its 2006 initial stock offering.

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Leading payment card processor First Data, meanwhile, on Wednesday said total credit and debit card transaction volume grew 5% year-over-year in the third quarter. Debit card issuer transactions increased 9%, more than any quarter since the start of 2010.

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First Data chief financial officer Ray Winborne reported that an unspecified number of merchant accounts contributed by Bank of America Corp. to the First Data/BofA merchant alliance known as Bank of America Merchant Services (BAMS) would convert to First Data systems from the legacy BAMS settlement platform or those of processors Total System Services Inc. (TSYS) and Chase Paymentech. First Data expects $65 million to $70 million in incremental annual revenue from the conversion, which will cost about $75 million. BofA will share those expenses, Winborne said.