Visa Announces Network Participation Fee in Response to Durbin

by Mercator Advisory Group 0

Visa’s quarterly earnings call Wednesday evening offered further hints at how the company will be adjusting payment system economics in response to the debit interchange price caps and network routing regulations imposed by the Durbin amendment. Acquirers will be subject to new “network participation fees” on all Visa card products. Though the value of the fee was not communicated on the call, we anticipate the fee amount to be revealed soon.

Visa chairman and CEO Joe Saunders did offer guidance that the fees would be “based on both the size of the merchant and the number of merchant locations.” Saunders also indicated that Visa “will extend to merchants of all sizes through direct negotiations and through acquirers the successful partnership programs we have historically offered issuers. We will also increase our engagement with merchant associations to achieve the same goal. Now a broad set of acquirers and merchants can receive incentives from Visa in exchange for routing commitments.”

International Business Times has a roundup of various equity analyst interpretations:

“We believe more pricing competition between Visa, MasterCard (will need to address on next week’s earnings call), and other PIN networks will accelerate. Given Visa’s overall unit cost advantage relative to the competition; however, we believe they will be able to retain a significant portion of its debit volume,” said Daniel Perlin, an analyst at RBC Capital Markets.

“We believes the new ‘membership fee’ charged to acquirers on a per merchant/per site basis for accepting any Visa card (credit or debit) will attempt to offset lost fees from Durbin price concessions to issuers,” said Gil Luria, an analyst at Wedbush Securities. However, Luria believes Visa may encounter at least some level of resistance from either acquirers and/or merchants (to the extent the fee is passed on to them), in spite of the lower variable fees that will go hand-in-hand.

“This new disclosure plus a continuation of solid fundamentals, reiteration of fiscal 2011/2012 guidance, and new $1 billion share buyback plan net out neutral to slightly positive for shares, in our view,” said Jason Kupferberg, an analyst at Jefferies.

“For competitive reasons, management did not provide too much detail; however, we believe the idea of a new pricing model may lead to margin concerns,” said Scott Valentin, an analyst at FBR Capital Markets.

Valentin said the company’s management reiterated fiscal 2011 and fiscal 2012 guidance. He said incorporated in fiscal 2012 guidance is the assumption of loss of PIN volume, loss of signature volume to PIN (although we believe this will be minimal), and lower U.S. debit margins.

Valentin said the global secular trend of payments transitioning from cash/check to plastic/electronic continues to fuel high revenue growth and we believe has a high level of certainty, which should provide a supportive backdrop for mid- to high-teens EPS growth for a long time.

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