Corporate America Discovers Payments - Digital Transactions

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according to ISO executives. Someof the smaller retailers aren’t reallyaware of them, Helgeson says. Manyof the larger, more sophisticated retailchains that have become much moreeducated about payment card costs inrecent years, however, are aware ofthem and are not happy, he says.“In general, merchant tolerancefor any fee increase has gotten prettylow,” says Helgeson. “They are moreaware of fees that are charged andhow they affect their bottom line.”except we are still paying the highprices,” he says.With the network fee increasesspecifically, large chains with lowtickets are affected the most. Unlikeinterchange fees, which typically arepercentage-based but often include aflat fee too, the new fees are straightflat rates. That means a jeweler sellinga $1,000 necklace pays the same feeas a coffee shop with a $5 purchase.“One-point-five cents on $100is less than 2 basis points whereasFee Income Grows for the Card Networks(In millions, quarter ending Sept. 30)Visa 2009 2008 ChangeFees $727 $548 32.7%Transactions 10,463 9,590 9.1%MasterCard 2009 2008 ChangeFees $546 $469 16.4%Transactions 5,788 5,377 7.6%Note: Figures include transaction and data-processing fees of all types but exclude assessments andcross-border charges.Source: Visa Inc., MasterCard Inc.Indeed, many retailers believethey are already paying more becauseof the network fees. “We’re verymuch aware of these fees,” says MitchGoldstone, president of 30 MinutePhotos Etc. and ScanMyPhotos.comin Irvine, Calif., and one of the plaintiffsin lawsuits against the networksand big banks over interchange. “Thisis another example of the hidden taxnot only on merchants but on Americanfamilies.”Goldstone questions the need toraise the price of authorizing or settlingtransactions at a time when technologyis making it less expensive toprocess electronic payments. “Historically,these fees were invented ata time when you had manual imprinters.As the process became more electronic,it became super-fast and supercheapto process the transactions,1.5 cents on a $5 purchase is about 30basis points. And that is significant,especially if the retailer has a lot oftransactions that size,” says Helgeson.Still, others believe that while thefees themselves won’t generate a lotof notice, any increase in the retailers’bottom-line costs will.“There is an overall sentiment thatthe costs are too high and merchants’overall payment-acceptance expensesare a big concern to them,” says MarcGardner, president of North AmericanBancard, a big ISO based in Troy,Mich. “But while retailers are concernedabout their total costs, they arenot focused on any one line item inaccepting credit cards as payment.”The exceptions to that, Gardnersays, are very large national chainsthat receive all the various fees brokendown on their statements. “Butthe retailers that are the bread and butterof the ISO business, which are thesmall-to-mid-size retailers, are onlylooking at the total cost,” he says.Investor AwarenessWhile an extra penny a transaction maynot add up to much for many small merchants,it does in aggregate—especiallyfor Visa and MasterCard. For the cardnetworks, the fees are a welcome way toincrease revenues during tough times.Both have been experiencingdeclining U.S. credit card volumes inrecent quarters, though Visa’s fourthquarterfinancial report indicates thatthe declines are slowing down. Andwhile debit card volumes are still onthe upswing, the increases are not asstrong as in prior years.“Any time you can essentially triplerevenue from one source, it is goingto have a significant impact on yourbottom line,” says Aite’s Moussa.The fee increases arise in partfrom the card networks’ transitionfrom bank-owned associations tocompanies whose shares trade on theNew York Stock Exchange. Master-Card had an initial public stock offering(IPO) in 2006, and Visa went publicin 2008. The pressure on the topmanagement of public companies forearnings increases can be intense.“Visa and MasterCard are showingthey are a for-profit business now.Whenever there are declines in yourcore business, you raise your fees,”says Chris Allen, director of consultingservices for Dallas-based HitachiConsulting. “They were under pressureto increase their revenues. Thefinancial community is bound tonotice the impact of the fees.”Visa’s earnings report for thequarter ending Sept. 30 reflected theimpact of the increased revenue fromnetwork fees. Worldwide (excludingWestern Europe) processed transactionsgrew 9% from a year earlier to10.5 billion, but data-processing revenues—mostlyfees—grew 32.7% to$727 million (chart).24 digitalDecember 2009
MasterCard, which reported itsthird-quarter earnings just beforeDigital Transactions’ deadline, saidtransaction-processing fees increased16.4% over 2008’s third quarter, primarilydue to U.S. pricing changesthat took effect in April. The changesaccounted for 11 percentage pointsof the increase, with growth in transactionvolume accounting for mostof the rest.Analyst Friedman attributesbetween one and two percentagepoints of Visa’s approximately 10%revenue growth to the price increases.Furthermore, he attributes betweentwo and four percentage points ofVisa’s 10% quarterly earnings gain tothe increased network fees.Before the IPOs, Wall Streetsometimes seemed confused aboutthe workings of the card networksand payment card revenue flows. ButFriedman says stockholders are awareof the effect the network fees had onVisa’s bottom line.“Investors seem to understandthese things better than they used to,”he says. “If you read the transcriptfrom Visa’s earnings call, people wereasking about the [new] fees.”on $1.9 billion in operating revenue.Particularly encouraging for the industrywas that while credit card volumewas down 9% from the year earlier,the pace of decline appears to be slowing.Visa said the decline was only 7%for the month of September comparedto year-earlier numbers and down 4%for the first three weeks of October.Meanwhile, debit card volume, up7% during the fourth quarter, waseven stronger in September, up 9% forthe month. Friedman was particularlyimpressed with the debit card numbers,noting that a 7% gain was a few pointshigher than what analysts expected.Still, it was the 33% increasein data-processing revenues thatimpressed many financial analysts. Inresponse to a question during Visa’searnings call about how the authorizationfee increase affected processingrevenue, Byron H. PollittJr., Visa chief financial officer,said, “We had very strong transactiongrowth in the 9% range for thequarter, year-over-year, and then the‘Visa and MasterCard are showingthey are a for-profit business now.’acquiring fee does have an amplifiedimpact on data-processing fees.So think of the balance as pricingactions, in combination with strongtransaction growth.”As recipients of fee revenue,the networks look like they’ll enjoythe effects of their pricing actionsfor some time. The big unknownis whether price resistance willbuild, as it has against interchange,as merchants increasingly noticenetwork fees. DTPrice Resistance?Going forward, the increased fee revenueshould continue to help Visa’sfinancial performance, Friedman says.However, he adds that because this wasthe first quarter in which revenues andearnings were affected by the fees, thecomparison will be much greater thisyear than it will be in future years.“This is what we call head winds.It helps the comparison numbersthe first year but you need to findsomething else or hope the economyreally improves to keep thecomparison numbers going at theserates,” he says.To be certain, there was other goodnews in Visa’s earnings report. Revenuesand earnings exceeded the company’sand analysts’ expectations withquarterly net income of $552 milliondigital25
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