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Visa offering incentives in response to new regulations

Visa offering incentives in response to new regulations

July 28th, 2011 by EILEEN AJ CONNELLY, AP Business Writer in News

NEW YORK (AP) - Visa Inc. will offer a new menu of incentives to retailers and their banks as part of its effort to offset the impact of new regulations on debit card use.

The San Francisco-based payments processor said Wednesday that it will use a series of strategies like reducing certain fees charged to handle debit purchases, and fixing other fees that are now variable, to make its network more appealing to merchants.

Under the new regulations, stores will have the option of choosing which network handles transactions, whereas in the past that was mainly determined by contracts. Giving retailers a choice in routing could mean a big hit to Visa's revenue. The strategies are designed to encourage merchants to choose Visa to process their sales.

"We expect this will help us win routing decisions and maintain debit in the new environment," said CEO Joseph Saunders during a conference call to discuss the company's fiscal third-quarter results. "With these actions, we are resetting our baseline economics for debit in the United States and positioning Visa to grow from here."

Visa, which holds a significant lead in debit card market share over rival MasterCard Inc., has said the new rules will hurt a stream that currently accounts for about 20 percent of the company's revenue. The regulations also include a cap on so-called interchange fees that is expected to average about 24 cents per transaction, down from an average of 44 cents now, starting Oct. 1.

The company accordingly forecasts slower growth in revenue and earnings per share for its next fiscal year, which starts the same day.

For 2012, Visa projects high single- to low double-digit percentage growth in revenue and mid-to high-teens percentage growth in earnings per share.

"That's pretty attractive, given that 20 percent of their revenues were cut in half," said Edward Jones analyst Shannon Stemm.

Analysts, on average, were expecting 11 percent revenue growth and 16 percent earnings growth for 2012, according to FactSet.

Stemm said consumers are likely to see banks emphasize debit cards less because they stand to lose revenue under the new regulations. But that will probably come in reduced marketing efforts and cuts in debit rewards - not the derailment of growth in the debit business.

"We expect debit growth to continue to outpace credit," she said.

During Visa's third quarter, U.S. debit card use rose 11 percent and remained well ahead of credit card use as consumers continue to watch their spending and be cautious about running up debt. Yet credit use also rose 10 percent, the sixth straight quarter of gains after a big drop during the recession.

The company said its fiscal third-quarter net income shot up more than 40 percent, to $1 billion, or $1.43 per share. Adjusted for accounting related to its European business, Visa's net income for the quarter was $883 million, or $1.26 per share.

That topped the $1.23 per share expected, on average, by Wall Street analysts, according to FactSet.

Revenue rose 14 percent to $2.32 billion, from $2.03 billion a year earlier, also topping analysts' average forecast, which was for $2.3 billion.

Visa said its strong results reflected growth in how often people used their cards and how much they spent, and in the number of cross-border transactions.

International growth was key to the results, with total volume leaping nearly 25 percent for credit purchases outside the U.S. and 27 percent for debit purchases. Visa has said it aims to boost revenue overseas, in part to offset profit lost to increasing regulation in the U.S.

During the conference call, Saunders detailed its growth in markets from Brazil to Russia and Japan to sub-Saharan Africa where the company expects revenue to substantially increase in the next five years. In India, for instance, over 1 million Visa debit cards have been issued in the last few months under a deal with the State Bank of India. And in Japan, a major bank recently launched Visa's first traditional debit program in that market.

During the quarter, the company repurchased about 13.7 million class A common shares, at an average price of $77.36 per share, for a total cost of $1.1 billion. Visa said its board has approved a new $1 billion buyback program through July 20, 2012.

Visa also reiterated its forecast for its full fiscal year, which ends Sept. 30. It continues to expect revenue to rise between 11 and 15 percent, or between $8.95 billion and $9.11 billion. It expects earnings-per-share growth of at least 20 percent, or least $4.84 per share.

Wall Street expects revenue of $9.15 billion on average and earnings of $4.92 per share.

In afterhours trading, Visa stock added 18 cents, to $87.93, from its close in Wednesday's regular session at $87.75.