MasterCard takes $495M charge to cover fee suit

NEW YORK (AP) - MasterCard Inc. on Thursday said it recorded a $495 million charge in its fourth quarter to cover potential losses related to a lawsuit brought by retailers over the fees they pay on credit card transactions.

Without the charge, MasterCard's earnings topped expectations, as shoppers put more purchases on debit and credit cards during the holiday season. The company also repeated strong earnings and revenue guidance for the next two years. Shares rose nearly 7 percent.

The Purchase, N.Y.-based payments processor said the charge represents the after-tax portion of a potential settlement in the case, and is based on progress seen in mediation. On a pre-tax basis, the charge was $770 million.

"Based on what the discussions are as of last night, I had to make a judgment," said Chief Financial Officer Martina Hund-Mejean in an interview. "This is not the low end of the range, this is our best estimate of what kind of loss MasterCard might incur."

Wall Street had speculated the pre-tax bill would run about $1.2 billion to $1.8 billion if MasterCard and rival Visa Inc. settle the suit.

The class action suit stretches back to 2005, and also involves most major U.S. banks as defendants. The merchants include grocery chains Kroger Inc. and Safeway Inc., Rite Aid Corp., QVC Inc., the National Association of Convenience stores, and a long list of other trade groups and small merchants.

The retailers maintain that Visa, MasterCard and the banks violate antitrust laws by fixing the fees they pay to accept credit and debit cards. Visa and MasterCard do not lend to the people who use the cards that bear their logos, they make money on these fees, called "interchange" in the industry. The fees average a little under 2 percent of the price of a purchase, but may vary. They are set by the processing networks but collected by, and split with, the banks that issue the cards.

The suit is set to go to trial in September before the U.S. District Court for the Eastern District of New York, but many analysts and investors expect a settlement before that.

CEO Ajay Banga said during a conference call to discuss the results that while the details of the mediation discussions remain confidential, "I want to make clear that we would not agree to any significant or long-term reduction in MasterCard's credit interchange rates as part of any settlement."

That statement was encouraging for investors, said Jason Kupferberg, an analyst with Jefferies and Co. "At the end of the day, investors are less worried about the monetary aspects of a potential settlement," he explained. The real concern is that the settlement would cut into the interchange rates and threaten future revenue.

The charge cut deeply into MasterCard's fourth-quarter profit. The company posted net income of $19 million, or 15 cents per share, compared with $415 million, or $3.17 per share, in the 2010 fourth quarter.

Excluding the charge, MasterCard said it earned $514 million, or $4.03 per share. That topped analysts' average expectation of $3.92 per share, according to data provided by FactSet.

Revenue rose 20 percent to $1.73 billion, from $1.44 billion in the prior year. That matched Wall Street's forecast.

MasterCard said use of debit cards in the U.S. rose faster than the use of credit cards during the holiday shopping season. That's happening even as banks cut debit card rewards programs and ramp up incentives to use credit cards in response to a law that kicked in Oct. 1. The law cut the fees merchants can be charged for debit card transactions - fees similar to those being fought over in the lawsuit.

Debit card use rose more than 18 percent during the quarter, with card holders making $139 billion in purchases. Credit card use rose nearly 7 percent to $143 billion.

Debit card use also rose sharply in the rest of the world, which accounts for more than half of MasterCard's revenue. Outside the U.S., $176 billion was purchased using the cards linked to bank accounts, a 23 percent jump.

Credit card use more than doubled to $405 billion.

For the year, MasterCard reported profit of $1.91 billion, or $14.90 per share, up 3 percent from $1.85 billion, or $14.10 per share, for all of 2010. Revenue leaped 21 percent to $6.71 billion, from $5.54 billion the prior year.

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