Debit payment volumes are on the rise
worldwide, and in the US at least, consumers are shifting more
non-discretionary spending onto debit. Both Visa and MasterCard
evidenced this trend in their latest financial results, but both
also pointed to a slowdown in credit payment volumes.
Victoria Conroy reports.

Visa Inc. has reported a solid set of fiscal third quarter results
which underline debit’s growing momentum in the US, and a strong
rise in cross-border transactions. Visa said that the results also
demonstrate the strength of its post-IPO business model in
weathering the effects of the US economic downturn, in which the
company saw US credit payment volumes hold up despite a slowing in
consumer discretionary spending.

Net income jumped 41 percent to $422 million for the fiscal third
quarter compared to $299 million in the year-ago period, and net
operating revenue rose 18 percent to $1.6 billion, driven by
service fees, data processing fees and cross-border transaction
fees as payment volumes and processed transactions rose across all
global regions. Total Visa-branded cards rose 14 percent worldwide
to 1.6 billion, with payments volume rising by 19.1 percent to
reach $652 billion. Total volume including cash volume was $1.03
trillion, an increase of 22 percent from the year-ago period.

It is the rise in global debit usage that stands out in the latest
set of results. Worldwide, Visa debit programme payment volumes
rose by 44.1 percent, representing $35 billion, while in the US,
debit rose by 16.3 percent to reach $193 billion, outstripping the
15.5 percent increase in US debit in the previous quarter.

US credit growth slowdown

With many of the larger US credit card issuers having posted
disappointing financial results for their credit card operations
recently, it was to be expected that this would also impact upon
both the card networks’ results in the form of slower credit
programme growth.

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Visa’s credit programme payment volume growth outside the US
recorded a 29.5 percent jump compared to the year-ago period.
Despite the economic slowdown in the US, credit programme payment
volume growth there still rose by 8.1 percent, although the rate of
growth is falling – in the previous quarter US credit programme
payment volume growth was 9.7 percent.

Joseph Saunders, CEO of Visa Inc., said that the company was
continuing to see increases in consumer driven non-discretionary
spending on cards.

In a conference call with analysts, he said: “Through the end of
June, US consumer non-discretionary spend as a percentage of total
spend is up two percentage points over the end of 2007, and now
represents 44 percent of overall Visa consumer payments volume in
the US.

Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, told
CI: “Visa’s results were solid, particularly in light of the
current state of the macroeconomic environment. Additionally, it
would appear that while there has been some weakening in the US,
Visa’s relatively higher exposure to debit and strong international
volume growth appear to be cushioning the gradual deceleration in
the US.”

Mixed results for MasterCard

For MasterCard, the picture was less rosy. It reported a net loss
of $747 million due to a $1 billion after-tax charge related to its
recent anti-trust litigation settlement with American

Excluding this charge, MasterCard’s net income amounted to $276
million. Net revenue jumped by 25 percent to $1.2 billion over the
year-ago period, in part due to currency fluctuations which
contributed 5.4 percentage points of the increase in net revenue
for the quarter.

Also driving up net revenue were growth in MasterCard’s gross
dollar volume (GDV) of 12.8 percent to $655 billion, a 13.6 percent
increase in the number of transactions processed to 5.2 billion and
an increase in cross-border volumes of 18.9 percent.

Drilling down deeper into MasterCard’s results, it’s evident that
MasterCard is also seeing a greater proportion of its profits
coming from overseas markets and from increased debit usage. Debit
programme GDV growth outside of the US experienced 32.6 percent
growth, while the US recorded 15.8 percent growth.

Credit and charge card programme GDV growth outside the US rose by
27.4 percent from the year-ago period, whereas US credit GDV growth
was just 0.7 percent, compared with 4 percent in the first quarter
of 2008.

Martina Hund-Mejean, CFO at MasterCard Worldwide, said in a
conference call with analysts that the US economic slowdown is
beginning to bite.

She said: “Over the last few quarters we have seen a steady
decrease in US GDV growth from 10.6 percent in the fourth quarter
of 2007 to 8.9 percent in the first quarter of 2008, and now the
GDV growth for the second quarter is 6.2 percent.”

She also indicated that with US issuers cutting back on credit card
lending across the board, the fall in US credit programme GDV was
not down to any one MasterCard member in particular, but rather a
malaise that was being felt by the industry in general.

“In the US we are still seeing consumer spending patterns shift to
more non-discretionary purchases,” she added. “The impact of higher
inflation and lower housing prices are compounded by the fact that
consumers are finding it increasingly difficult to obtain credit as
financial institutions tighten their criteria for loans and credit

As such, MasterCard Worldwide has refined its earnings outlook for
the full year 2008, with Hund-Mejean stating that it expects slower
net revenue growth than the 22.3 percent growth MasterCard
experienced in 2007, “but still at double-digit rates”.

After meeting with MasterCard’s senior management following the
results announcement, Sakhrani told CI: “MasterCard’s results did
not ‘beat’ by as large of a margin as they have in the past and US
volume growth was weak. A lot has been made about the 0.7 percent
growth MasterCard posted for US credit GDV growth in the second

“However, it is important to note that GDV includes cash volume and
the company does not make significant revenues off of cash volume.
The more relevant metric to observe is purchase volume, whose
growth was a little more respectable at 2.8 percent in US credit
[vs 6 percent year-on-year growth seen in the first quarter].

“While MasterCard did not rule out the potential for volumes to be
negative (in a scenario where conditions get meaningfully weaker),
it is important to note that the company has not experienced any
quarters in the last 10 years where credit GDV growth has been