Visa's New Participation Fee: Analysts View

on July 28 2011 9:58 AM

Visa Inc. (NYSE: V) will implement a new fixed acquirer fee called the "Network Participation Fee" that will apply to both credit and debit cards, in order to help the company win routing business and maintain debit volumes.

RBC Capital Markets

Visa will also lower variable processing fees and the actions are designed to lower merchant fees and essentially let the retailer capture more of the scale benefit. Visa is the first company to reveal its Durbin migration strategies, RBC Capital Markets said in a note to clients.

"We believe more pricing competition between Visa, MasterCard (will need to address on next week's earnings call), and other PIN networks will accelerate. Given Visa’s overall unit cost advantage relative to the competition; however, we believe they will be able to retain a significant portion of its debit volume," said Daniel Perlin, an analyst at RBC Capital Markets.

Perlin believes Visa is also porting the fixed cost leverage, typically fully enjoyed by Visa, to the merchants, which should help drive routing. He would continue to be a buyer of Visa as increased clarity around mitigation strategies for Durbin should continue to lift the multiple and increases our confidence in a re-acceleration of growth in fiscal 2013.

Wedbush Securities

Wedbush Securities said new "Network Participation Fee" introduced on the call offers hint to Visa’s plans for adjusting to post-Durbin world.

"We believes the new 'membership fee' charged to acquirers on a per merchant/per site basis for accepting any Visa card (credit or debit) will attempt to offset lost fees from Durbin price concessions to issuers," said Gil Luria, an analyst at Wedbush Securities.

However, Luria believes Visa may encounter at least some level of resistance from either acquirers and/or merchants (to the extent the fee is passed on to them), in spite of the lower variable fees that will go hand-in-hand.

Luria believes Visa will continue to grow on the strength of its international business. However, he believes that the implementation of the Durbin Amendment will create a drag on U.S. revenue growth based on some price pressure from large issuers, as well as potential volume deceleration resulting from changes to debit programs.

Jefferies

Jefferies & Co. said Visa's new merchant "network participation fee" seems to be key to Visa's Durbin response strategy. The fee applies to all of Visa's U.S. products and is tied to merchants' size and number of locations.

Jefferies said the new "network participation fee" seems to be designed to increase the fixed versus variable component of network fees paid by merchants, thereby theoretically incenting them to route more volume over Visa's network to lower their unit costs and enjoy economies of scale.

"This new disclosure plus a continuation of solid fundamentals, reiteration of fiscal 2011/2012 guidance, and new $1 billion share buyback plan net out neutral to slightly positive for shares, in our view," said Jason Kupferberg, an analyst at Jefferies.

FBR Capital Markets

On the call, Visa disclosed a new pricing model for all U.S. products (debit, credit, prepaid, etc.), which tweaks historical fixed and variable pricing components of the network fee, allowing merchants to lower the variable-rate portion of the fee, based on volume -- a necessity in the new environment of merchant-controlled routing, FBR Capital Markets said in a note to clients.

"For competitive reasons, management did not provide too much detail; however, we believe the idea of a new pricing model may lead to margin concerns," said Scott Valentin, an analyst at FBR Capital Markets.

Valentin said the company's management reiterated fiscal 2011 and fiscal 2012 guidance. He said incorporated in fiscal 2012 guidance is the assumption of loss of PIN volume, loss of signature volume to PIN (although we believe this will be minimal), and lower U.S. debit margins.

Valentin said the global secular trend of payments transitioning from cash/check to plastic/electronic continues to fuel high revenue growth and we believe has a high level of certainty, which should provide a supportive backdrop for mid- to high-teens EPS growth for a long time.

While fiscal 2012 will be a transition year, when debit card economics and volumes are reset, post-Durbin, Valentin believes operating results will accelerate in fiscal 2012.