Ready for Round 2: Regulators Probe Visa's Debit Pricing System

Regulators are calling Visa (NYSE: V) back into the debit boxing ring.

The world's largest payments network disclosed late Wednesday that the Justice Department's antitrust division is probing its new pricing system. Last year, Visa changed the way it charges merchant acquirers, in an effort to insulate itself from the effects of new regulations on debit card swipe fees — but now it appears that those efforts may backfire.

The Justice Department's civil investigative demand, issued on March 13, comes almost two years after the Durbin amendment to the Dodd-Frank Act first proposed restrictions on how banks and networks charge merchants for accepting debit cards. But even as the industry's Durbin compliance efforts start to wind down, regulators are still paying very close attention to how Visa and rival MasterCard (MA) set the fees for accepting and processing cards.

"It's one more swing of the flag" by antitrust regulators, says longtime card industry consultant Andrew Kahr.

While Visa and MasterCard "have shown tremendous resilience" in dealing with the effects of litigation and regulation, "will that go on forever? Certainly not," Kahr says. "But this doesn't look like the telling blow."

Some industry members expressed more concern about the potential fallout of the Justice Department's new probe. Visa shares fell about $5 by mid-afternoon Thursday, to about $117.

"It really comes down to which lens DOJ uses to look at this thing," says Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods. "If they look at Visa exerting its market power and it being a net detriment to merchants, then you have to be concerned a little bit."

Visa met twice with the Justice Department in March, according to Chief Executive Joseph Saunders.

"We are confident our actions are appropriate and that our response to the DOJ supports that," Saunders told analysts on a conference Wednesday evening, to discuss the company's quarterly earnings.

Visa said that the inquiry involves its new fixed "network participation" fee for merchant acquirers, which it introduced in response to a part of the Durbin amendment that bans banks from signing exclusive debit processing deals with networks. As of April 1, banks have to allow merchants to process their cards on at least two debit networks. That requirement was a blow to Visa, which has long dominated the U.S. debit card processing market, and which has already started to lose some debit business to MasterCard and other rivals.

The new fixed fee rewards merchants and merchant acquirers who choose to route more of their debit card transactions across Visa's network.

"They're behaving like a rational dominant competitor that was faced with a threat that was outside their control," says payments consultant Eric Grover of Intrepid Ventures, who calls the new fee a "calculated risk."

"No one at Visa was surprised when they received that CID, or I would be surprised if they were surprised," he adds.

Sakhrani says, "Ultimately what they were trying to do was trying save a business, even if it wasn't the most profitable business. To the extent there's an adverse DOJ ruling that would probably disrupt that strategy."

Visa's new pricing system is more of a stop-gap measure than a money-maker for the company, according to Saunders.

"We are not making money per se off of that fee. The combination of discounts and incentives that we have put together, I think, actually [result] in a modest loss in the neighborhood of $100 million a year. So we aren't doing this with the intent of raising prices," Saunders told analysts during the call.

But Grover notes that Visa could end up benefitting from its new pricing system, depending on how effectively the company resolves regulators' antitrust concerns.

"If we're 18 months down the road and this has all quieted down, there's no reason their fixed fees don't go up 50%," he says.

A spokeswoman from the Justice Department declined to comment on the probe.

The new debit-card rules are already starting to affect some of Visa's growth. The San Francisco company said Wednesday that its U.S. debit payment volumes grew just 2% from a year earlier for the fiscal second quarter ended March 31, and fell 12% from a year earlier in the month of April.

"We are never going to regain all of the market share that we had in the debit card business," Saunders told analysts during the conference call. "Nothing that we say or none of our strategies suggest that that will happen or could happen…. The environment has changed by regulation."

But Visa has much less to worry about outside of U.S. debit. Net profit jumped 46% to $1.29 billion, as revenue grew 14.8% to $2.58 billion.

"If you look at all the operating trends ex-U.S. debit, I think you saw strong trends," Sakhrani says.

The total number of transactions worldwide rose 8% to 13 billion, and the dollar volume of payments made increased 11% to $956 billion.