Card firms have been dealing with plenty of head winds:
federal regulations, eurozone woes, negative foreign currency
translations and a slowdown in consumer spending.
How much have these head winds affected network-card
processing giantsVisa (
) andMasterCard (
On Wednesday after the market's close, Visa will be the first
to report how well it did or didn't do in the June-ending
quarter. MasterCard will follow next week.
UnlikeAmerican Express (
) and bank card issuers, Visa and MasterCard don't take on credit
risk. They process transactions over their networks.
They depend a lot on purchase volume to stoke their
American Express said last week that second-quarter global
spending on its credit cards grew slower than in recent quarters.
But spending was still up about 7% over the prior year.
"They're up against some tough comparables from last year.
Everybody had strong growth last year," said Nomura Securities
analyst Bill Carcache. "In addition to that, there is a slowing
According to Thomson Reuters, analysts expect Visa's profit in
the three months ended in June, its third fiscal quarter, to rise
15% vs. a year ago to $1.45 a share. That would be the slowest
growth in several quarters.
They see full-year profit growing 21% to $6.06 a share, on the
high end of management's guidance.
Visa doesn't have to worry so much about Europe since Visa
Europe is a separate company under terms of an agreement worked
out prior to Visa's IPO in 2008.
"For MasterCard, Europe is around 25% of revenue, and for Visa
it's virtually nothing," said analyst David Koning of Robert W.
Baird & Co.
Analysts say one reason Visa's stock has done better than
MasterCard's this year is because it has less exposure to Europe.
But MasterCard posted relatively strong growth in Europe in the
first three months, not withstanding weakness in the southern
The strengthening U.S. dollar has a downside. When translated
back into U.S. dollars, spending in other currencies means slower
revenue growth since the card companies report in U.S.
"MasterCard's revenue will be hit more than Visa's this
quarter by a stronger dollar," said analyst Bob Napoli of William
Blair & Co.
MasterCard derives more than 60% of its revenue from
international markets. Visa takes in more than 50% of its volumes
in the U.S. It's close to its 2015 goal of boosting international
revenue to at least 50% of its total.
Visa's credit business, said Carcache, "has been great,"
driven in part by affluent consumers. But it likely slowed in the
last quarter, he says.
In the U.S., Visa's market-leading debit business has taken a
hit as a result of new routing regulations effective April 1,
which prohibit network exclusivity in PIN-debit issuance.
William Blair & Co. estimates that Visa's debit volume
fell 12% in April and 8% in May vs. a year ago.
But Napoli figures the impact on revenue will be more
restrained due to lower yields from debit. U.S. debit makes up
30% of Visa's total purchase volume but only about 20% of total
revenue, he has estimated.
And Visa's debit business should reaccelerate as it begins to
win back share due to new pricing schemes that make it cheaper
for merchants to use Visa, Koning says.
The Department of Justice is looking into Visa's competitive
responses to debit and merchant fee regulations, but Carcache,
for one, doesn't think the probe will come to much.
A long-running merchants' class-action lawsuit over
credit-card swipe fees was settled recently with Visa, MasterCard
and large U.S. banks agreeing to pay about $7 billion.
) this week called on merchants to reject the proposal because it
doesn't go far enough in addressing structural issues and
"hidden" swipe fees.
Visa, the world's biggest payments network, said its share
would be about $4.4 billion. It had already set aside funds to
cover most of the costs.
The agreement calls for a temporary cut in merchants' rates
and allows merchants to charge customers a surcharge on
But surcharges are prohibited in 10 states. Analysts don't
expect the new surcharge rules to have too much impact on
"The key question for merchants is going to be, do they want
to risk potentially frustrating consumers at the point of sale
and risk losing a sale?" said Carcache. "Merchants may actually
be more inclined to use it as bargaining tool with Visa and
MasterCard. Now, they'll have the power to say if you increase
interchange, we'll surcharge the heck out of customers."
Meanwhile, Visa is working to gain relevance in e-commerce and
Visa's new Visa.me pilot shows promise, analysts say. Now
offered at five online retailers, including Buy.com, it lets V.me
account holders make online payments with any major card using a
mobile phone, computer or tablet.
Similar toeBay's (
) fast-growing PayPal online payments system, users need only
enter their email address and password at checkout.
"It addresses the PayPal threat," said Carcache, "to the
extent Pay-Pal is taking business from them."
When V.me expands beyond the pilot, it'll have a good start
since over 400,000 online merchants from Visa's earlier
acquisition of CyberSource will be able to use the program right
away, Carcache says.
But new initiatives like that are seen as longer-term growth
For now, investors are worried about the global economy and
Carcache says they might take some comfort in knowing that
Visa and MasterCard spending volumes typically are 5% to 6%
higher than global GDP growth.
Even during 2009, when global growth was slightly negative,
the card companies posted positive volume growth, though
"The first question I get in meetings with investors is,
what's going to happen if there is another recession?" Carcache
said. "They are not immune to recession. But I believe they will
be relative outperformers."
That's because migration from paper to electronic forms of
payments "is a strong secular tail wind and that's not
About 85% of the world's transactions are still in cash, he
"The opportunity for growth is so large without killing each
other over market share. The loser ends up being cash," Carcache