Regulatory reforms may help MasterCard Inc. steal debit card market share from Visa Inc., but it's not clear whether that would do much for its bottom line.
MasterCard said a provision of the Dodd-Frank financial reform act will help it attract more debit customers. However, under another section of the law, the Federal Reserve is expected to slash interchange rates next year, and analysts say MasterCard will have a tougher time wringing profits from higher transaction volume.
"They should be able to pick up additional share," said Eric Grover, a principal with the payments consulting firm Intrepid Ventures in Menlo Park, Calif. "However, the additional share is almost certainly likely to come with reduced economics. The network economics for debit in the U.S. are going to take a big hit and that's true for everybody."
MasterCard has long been the underdog in the U.S. debit market, but analysts agree the provision in the reform law's "Durbin amendment" against exclusive network routing arrangements will help the company gain card issuers.
MasterCard executives echoed that stance Thursday during its media and analyst symposium at its corporate headquarters in Purchase, N.Y. They cited Visa's much higher share of the debit market and the fact that Visa has a larger number of debit issuer relationships under exclusive agreements.
"Given our lower market share in debit than our competitors and given that there is language in the bill around removing the exclusivity of one brand mark on a card for debit, I believe we have a real opportunity to grow our share of revenue in debit in the United States as a result of this act," Ajay Banga, MasterCard's president and chief executive, said during a presentation.
The Dodd-Frank law instructs the Federal Reserve Board to create regulations barring issuers and networks from restricting "the number of payment card networks on which an electronic debit transaction may be processed" to one network or two or more networks that are "owned, controlled, or otherwise operated by" affiliated networks.
That means a bank could not issue debit cards that only bear Visa's brand for signature transactions and the company's Interlink network for PIN transactions.
The intent is to give merchants more options, the idea being that they will choose to route transactions over the cheapest network.
"The ultimate beneficiary of this is someone who can deliver a lower all-in cost," said Andy Efstathiou, director of the banking sourcing program at NelsonHall, an advisory in Newton, Mass.
Visa and MasterCard do not collect interchange fees but their card-issuing banks do. If the Fed lowers debit interchange, industry experts say banks will demand concessions on the fees they pay to the networks to issue their cards.
"Can [MasterCard] get greater market share? Absolutely," Efstathiou said. "Then the question becomes do they want to."
He added, "They could double their market share and still end up with less revenue."
There also is uncertainty over how the payments networks will deal with the exemption in the debit interchange regulation for banks with assets under $10 billion. Such banks are not subject to the Fed's pending changes on debit interchange pricing.
Hypothetically, banks that meet the cutoff would benefit because their interchange revenue would not be at risk, Grover said.
But Tim Murphy, MasterCard's chief product officer for core products, said Thursday that the company has not decided whether it would support a two-tier interchange system, which could pose logistical issues.
"Technically it's do-able," but MasterCard is waiting to see what the Fed actually does before making a final decision, he said.
MasterCard already is growing in debit thanks to recent conversions of Visa-branded portfolios. It is converting SunTrust Banks Inc.'s debit cards and expects to begin doing the same soon for Chevy Chase Bank, which was sold to Capital One Financial Corp.
"We are winning a lot of new business in debit and we're taking a lot of business from Visa and the important part is we are taking business away in a framework of rational pricing," said Chris McWilton, the president of U.S. markets.
"The deal momentum has really strengthened our debit franchise in the U.S.," McWilton added.
MasterCard's debit growth strategy includes pursuing what McWilton characterized as nontraditional deals, such as the company's recent announcement that it formed a cobranded debit card relationship with Delta Air Lines Inc. SunTrust will be the main issuer of the card, though MasterCard will shop the card to issuers in other geographic markets.
Analysts note portfolio conversions happen occasionally and it will likely take several major wins for MasterCard to gain significant ground.
A Visa spokesman said the company sees "strong momentum" in its debit business.
