Visa Inc. will lower fixed and variable processing fees and reach out to more merchants in an effort to keep its leadership in the U.S. debit card industry after implementation of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act's Durbin Amendment, according Visa Chairman and Chief Executive Officer Joseph Saunders.
Visa, the runaway leader in U.S. debit card issuance, seeks to prevent erosion of its market share after April 2012, when rules go into effect that require all debit card issuers to offer merchants the choice of at least two unaffiliated processing networks. Rules set by the Federal Reserve Board capping debit interchange in accordance with the Durbin Amendment will go into effect Oct. 1, 2011.
Visa has dominated the U.S. debit card processing industry so far by offering only its processing services for its popular signature and PIN-debit cards. The final rule also caps debit interchange at 21 cents plus an adjustment for fraud loss and prevention.
Saunders told analysts listening to his recent quarterly earnings conference call the company has had double-digit growth in payment processing this year and plans continued profits navigating in post-Durbin economic waters.
"I continue to expect the impact resulting from regulation to be diluted but manageable, with fiscal 2012 bearing the majority of the financial impact," he said. "With the Federal Reserve's final rules in hand we have the clarity needed to execute our strategies. We are now moving forward on multiple fronts and with a variety of new offerings for our clients."
Saunders was not specific about the discounts his company will be offering after the new rules take effect next year, but he was clear the company will aggressively compete to hold on to old business and compete for new business.
"Regulation has dramatically altered the competitive environment in the United States and given merchants broad discretion over how transactions will be routed," he noted. "Recognizing this new dynamic, we are resetting our business approach and implementing a number of new strategies for all products.
"We recognize that we need to focus more than ever on delivering greater value to both issuers and merchants to win debit routing while continuing to grow our successful credit business. In that regard we are taking multiple actions to ensure we are positioned to compete for both issuers and routing."
Saunders outlined two strategies for maintaining Visa debit dominance. "First, we are modifying our economics in a way that we expect will result in a reduction of merchant costs in total and on the margin," he said. "The modifications include both fixed processing fees and a reduction in variable fees. We expect this will help us win routing decisions and maintain debit volume in the new environment."
Specifically, Visa is implementing a fixed acquirer fee called the Network Participation Fee that "will apply to the acceptance of all Visa products and is based on both the size of the merchant and the number of merchant locations," Saunders noted, adding that the money from the new Network Participation Fee will be used to invest in security and the payments network.
"In the aggregate, Visa will also lower our variable processing fees for all Visa debit products across all merchant segments," Saunders said. "That combination of fixed and variable fees offers merchants an even greater incentive to route more transactions over our network by providing them an opportunity to lower their per unit transaction costs and take advantage of economies of scale that are now more available to them.
"The second core element of our strategy focuses on additional value-added services aimed at winning routing decisions. These include powerful merchant benchmark loyalty rewards programs and real-time mobile messaging to drive merchant sales growth."
Saunders said Visa will now offer all its merchants the opportunity to join the same partnership programs the company has always offered issuers. The company will reach out to merchants through direct negotiations, through ISOs and by working with merchant associations.
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