Visa Inc. says some of its contracts with bank card issuers must be "redone" to comply with new debit card regulations that take effect this year, but most already meet the requirements.
The San Francisco payment network has reviewed the majority of its contracts to ensure they comply with the rules, Byron Pollitt, Visa's chief financial officer, said on a conference call with analysts Wednesday.
While a few contracts still need to be revised, Pollitt said, there is "no need to do a rush to redo an enormous number by Oct. 1," the date new caps on debit interchange fees take effect.
The caps, which the Federal Reserve Board finalized last week under a provision of the Dodd-Frank Act, stand to reduce the fees that Visa's card-issuing banks earn on debit card purchases by 45%. While the banks collect the fees, Visa and competing payment network MasterCard Inc. set the rates, called interchange.
Jason Kupferberg, an analyst with Jefferies & Co. Inc., said Visa's contract negotiations would focus on the rebates and incentives that the card brand pays to issuers and merchants, the network fees that issuers pay to Visa and provisions regarding exclusive routing deals with the network.
Visa executives declined to go into specific details about negotiations but Pollitt said with the rules giving merchants more control over how they route customers' debit card transactions, contracts need to "have the right incentives associated with them."
Analysts expect the card networks to offer incentives to merchants, just as they have to issuers.
"Now that the routing decision has been taken away from the banks and given to the merchants, incentive payments will shift from the banking to the merchant community," Tom McCrohan, an analyst with Janney Montgomery Scott, said in a research note published on Thursday.
The Fed's finalized rules require banks to carry at least two unaffiliated processing networks on their cards to give merchants more ability to route transactions over the cheapest network. For example, a bank using Visa to process signature transactions would have to include a PIN network other than or in addition to Visa's Interlink PIN debit network. The majority of the network exclusivity rules take effect for issuers in April 2012.
Tien-tsin Huang, an analyst with JPMorgan Securities LLC, wrote in a research report published last week that he estimates about 40% to 50% of debit cards bearing Visa's logo already comply with the network exclusivity rule.
Visa said it expects the new rules to slow net revenue and earnings growth in the next fiscal year.
The company said in a filing with the Securities and Exchange Commission after the markets closed on Wednesday that net revenue should increase in the "high single-digit to low double-digits" percentage range in fiscal 2012.
It also expects diluted earnings-per-share growth for its class A common stock to be in the middle-to-high teens.
That compares to expected growth of 11% to 15% for net revenue and diluted EPS growth of more than 20% in the current fiscal year, matching projections that Visa gave in May.
Huang, in a note published Wednesday, said Visa's guidance confirmed that the regulations "should be manageable" for the company.
"We're looking at this as a significant change in the way things are done," Joe Saunders, the chairman and chief executive of Visa, said on the call. "I think it's a permanent change in the way things are done and I'm excited about our opportunity to compete."
Pollitt said Visa will feel the strongest effects next year from the Dodd-Frank Act's Durbin amendment, which is named after its proponent, Sen. Richard Durbin, D-Ill.
Saunders declined to go into detail about strategies Visa will use to sustain revenue and compete against other PIN debit networks. The company also faces competition from other PIN debit networks, including MasterCard Inc.'s Maestro, First Data Corp.'s Star network, Discover Financial Services' Pulse network and others.
"We expect our competitors to be aggressive," Saunders said, adding that Visa expects "to have some deterioration in our PIN business."
A spokesman for MasterCard, which has not discussed the potential financial impact of the regulations since the Fed finalized its rules, declined to comment on Thursday.
Visa holds about 75% of the signature debit market and 55% of the PIN debit market, according to Huang. While he does not expect the rules to have a "material impact" on Visa's signature debit share, Huang wrote in his note last week, he estimated that the company could suffer a "five-point reduction" in PIN debit share.
"I still believe we're in a better position to compete in this environment than anyone else," Saunders said. "Until somebody shows me that they've got more than we do, I'm going to continue to believe that."
Visa also said it completed a $1 billion share repurchase program that it authorized in April, which resulted in the buy-back of 13 million shares at an average price of $77 each.
