Game of Loans: Impact of Credit Tie on Competitive Dynamics in US Debit
The relative outperformance of MA versus V since end-July, when a Federal District Court ruled in favor of dual-routing for signature debit, is hard to explain. It is likely predicated on a share shift in signature debit from V to MA if the ruling is upheld on appeal (with the share shift that occurred in PIN debit immediately after the original network exclusivity rules of the Durbin Amendment were implemented in April perhaps acting as precedent).
In practice, if dual routing in signature debit becomes a reality, Visa is likely to gain share from MasterCard in one scenario and unlikely to lose share in another. Specifically, Visa will gain share if there is no regulatory challenge to FANF because it will offer FANF rebates to merchants in return for debit volume. This approach, combined with Pin-Authenticated Visa Debit (“PAVD”), has already allowed Visa to reverse most of the share losses in PIN debit to MasterCard and the regional EFT networks which occurred in the immediate aftermath of Durbin implementation.
- While MasterCard is a tougher competitor in signature debit than the regional EFT networks in PIN debit (because it has a credit franchise and so the market power to impose its own FANF-like merchant-licensing fee called the Annual License and Registration Fee or “ALR”), it does not have the same pricing power as Visa because its credit franchise is half the size. This gives Visa a structural advantage in a dual-routing debit environment for signature debit.
- If the current regulatory investigation of FANF goes against Visa (on the grounds the fee represents an illegal tie of the credit to the debit franchise), it will lose structural advantage from credit, but will not be disadvantaged. More likely than a debit share shift is price competition with networks bidding down merchant fees (both interchange and switch) to marginal cost to win the merchant routing decision. With V more exposed than MA to US debit (representing 27% of global purchase volume versus 16% at MA), some valuation discount makes sense. However, both V and MA will be de-rated.
Of course, the Appeals Court may not uphold the District Court ruling for dual-routing of signature debit in which case MA likely gives back the outperformance since end-July. If, in addition, regulatory challenge to license fees undermines the advantage V enjoys in PIN debit over MA and regional EFT networks, Visa will protect share by cutting PIN debit interchange (to win merchant routing) and raising signature debit interchange (to compensate issuers); in other words, Visa will leverage market power in signature debit into PIN debit.