The payment solution industry continued to grow through the first three months of 2013. Card giants Visa (NYSE:V) and MasterCard (NYSE:MA) reported 15% and 9% gross revenue growth for the first quarter of the calendar year, respectively. Both companies were helped by a worldwide shift to plastic. Visa reported a 7% increase in global payment volume, while MasterCard reported an 11% growth in gross dollar volume [GDV] across the world.
Both companies earn revenues from their banking clients. Assessment fees are charged as a percentage of the GDV of transactions processed for a client while data processing or transaction fees are charged on the basis of the total number of transactions processed for a client. The companies also charge cross-border fees for transactions where the issuer or card holder’s bank and the acquirer or merchant’s bank are based in different countries.
The Battle For U.S. Volumes
Visa processed close to 14 billion transactions through its network in the March quarter, an increase of 6% over the prior year’s figure. U.S. growth was hindered by the implementation of the Durbin amendment to the Dodd-Frank bill, which requires banks with more than $10 billion in assets to use separate payment processing networks for signature authorized and PIN authorized debit card transaction [The Durbin Amendment Explained]. The company, which dominates the U.S. market with close to three-quarters of the market share, reported a 3% increase in transactions processed in the country. The U.S. is an important market for Visa, accounting for 40% of its payment volume. MasterCard capitalized on Visa’s loss, with an 11% growth in U.S. transactions, primarily driven by signature processed debit transactions.
Visa’s management also revealed growth figures for the month of April, with a 15% transaction growth driven by market adoption of the debit regulations. We expect the growth rate in processed transactions to normalize in the long term as the debit regulations are adopted by the market. Please read our article: How Will Visa Benefit From The Mobile Phone Revolution? for more on growth prospects.
The effects of the debit regulations were also evident on the payment volume. Visa’s payment volume through consumer credit cards increased by 11% in the U.S. while the consumer debit volume dipped 4%. MasterCard was able to snatch market share, particularly through PIN processed debit transactions. The company reported a 6% increase in debit card GDV, but only 2% growth in credit GDV leading to a 4% growth in GDV. As with transactions, we expect the market to adapt to the new regulations in the coming months, allowing both companies to normalize growth rates.
Normalization can already be observed, MasterCard’s 6% debit GDV growth rate for the first quarter was lower than 15% growth it reported in 2012. The low growth in credit cards is a concern for MasterCard as Visa continues to maintain dominance in this field.
PIN processed debit transactions have a lower revenue yield than other transactions. So, although MasterCard reported a 12% increase in processed transactions across the world, the increase in transaction processing fees was just 9%.
Continued Expansion Outside The U.S.
Both Visa and MasterCard continued to expand outside the U.S. Visa reported a 20% increase in transactions processed outside the country with payments volume increasing 9%. This led to a 25% increase in revenues from transaction fees and a 10% increase in assessment fees. The company also observed a 10% increase in global cross-border volume on a constant dollar basis, leading to a 13% increase in international transaction revenue. As a result of this revenue outlook, the company increased its EPS guidance from high teens to 20%.
MasterCard reported an 11% increase in GDV across the world with a 20% increase in Asia-Pacific, the Middle East and Africa. The GDV in Latin America grew by 11% while the European volumes increased by 13%. MasterCard’s cross-border GDV increased by 16% over the prior year’s figure. The company’s management expects net revenues to grow by 11-14% over the next three years. Our forecast is more conservative, with revenue and gross profit growth around 10% during this period. You can modify the interactive charts in this article and the company pages for Visa and MasterCard, to gauge the effect a change in forecasts would have on our price estimate.
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