Implications for Visa and FIS of Structural Change in US Debit
Given structural change in US debit, downside risks to Visa’s multiple in 2014 exceed upside risks:
- Growth: We expect growth estimates for network-switched bankcard debit in the US to be reset as checks, whose displacement has provided a secular tailwind, now represent half the volumes of debit versus four-times the volume a decade ago; and as alternative debit platforms rollout including the MCX merchant consortium and proprietary bank solutions such as that announced by Chase last February. Specifically, we expect CAGR in network-switched bankcard debit volume of 7% or below over the next 5 years versus 10% over the last 5 years, and CAGR in overall network-switched bankcard volume, including credit, of at most 6-7%.
- Pricing: Given regulatory risk and likely Court mandating of dual-routing for signature debit, Visa will not be able to offset decelerating volume with increased pricing as it has over the last few years. The implication is that US revenue will show a 5-year CAGR of at most 6-7% and overall revenue growth, including the international business, will likely be in the single-digits.
A risk to our pricing thesis is that Visa increases the monthly “FANF” licensing fee it charges merchants (technically acquirers) for accepting its products despite the regulatory risk of further using FANF to leverage market power in credit to debit. As it is, Visa has recovered share in PIN debit even though, post-Durbin, merchants have the option to route transactions over competing networks with lower per-transaction fees (see Exhibit below). Visa offsets higher per-transaction fees by offering merchants FANF rebates in return for debit routing; lacking credit franchises, PIN debit networks cannot compete in the same way.
- The Justice Department is investigating Visa’s debit strategy. It is hard to see how FANF is consistent with either: (i) the 2003 settlement in which Visa and MasterCard rescinded the honor-all-cards as a result of legal action by merchants claiming they violated the anti-tying rules; or (ii) Congressional intent in the Durbin amendment to increase fee competition among debit networks by giving merchants a network-routing choice transaction-by-transaction.
- Dual routing of signature debit will create a prisoner’s dilemma; given market power in credit both V and MA will have an incentive, despite regulatory risk, to raise the base level of merchant license fees and use rebates (rather than lower per-transaction pricing) to win debit routing.
To protect against the possibility there is no regulatory relief on FANF, merchants are collaborating through the MCX consortium to develop their own payments network that will settle “decoupled” debit transactions over ACH and FIS’ proprietary “PayNet” network and credit transactions through private-label partnerships likely with COF, ADS, and DFS. We expect merchant-distributed decoupled debit to grow at a 5-year CAGR of 20% and the MCX relationship to lift annual earnings growth at FIS by 2-3% from current guidance of 7%.