VISA

Financial Services

A study found that Visa and Mastercard had raised fees by over $1 billion since 2021. “The changes coming in April 2022 are quite complicated, but only affect consumer credit card transactions within the programs outlined below. While these are the largest changes coming, it is not an exhaustive list, and there are other smaller changes coming as well. CMSPI estimates that the total impact of these changes are $475 million in annual increases. Bringing the whole picture together, $475 million from Visa and Mastercard is added to the changes that went into effect last year from Visa, which CMSPI estimated to be worth $698 million dollars, and a grand total of $1.17 billion in increased fees for merchants annually.” (CSMPI, 2/23/2022)

Visa’s CEO said that because “inflation typically lifts transaction size…historically, inflation has been positive for us.” “Al Kelly — Chairman and Chief Executive Officer: So there are — the inflation has some puts and takes on our business. Service fees and international fees are basis points on volume. So inflation typically lifts transaction size. But offsetting that, incentives are also tied to volume, so there’s some offset to that lift. Fuel prices go up. But then on the other hand, sometimes consumers tend to moderate their buying in times of large increases in gas to the degree that, over time, if it was to happen, the dollar was to weaken, that increases inbound cross-border flows and the US inbound corridor is one of our largest and higher-yielding corridors. Expenses for personnel and marketing, professional fees could go up. But I’d say two things and then ask Vasant to add anything he wants. So far, we’re not — as I said and I think Vasant said in his remarks, we’re really not seeing much impact that’s causing us any concern in our numbers. And then, the last thing I’d say, net-net, historically, inflation has been positive for us.”

Visa’s CFO: “there’s multiple impacts from inflation. Net-net, it’s a positive for us. We have not seen any impact on discretionary spending that we can discern.”Vasant Prabhu — Chairman and Chief Financial Officer: Yeah. Just to add to what Al said, I mean we clearly have seen — we’ve seen ticket sizes go up in the US, in particular, in Europe, but it’s not all inflation. Some of it is mix. It’s mix driven by the fact that the card-present transactions, which often tend to be smaller transactions, have not yet fully come back. It’s mix also because e-commerce transactions, even when you do everyday purchases, can be larger ticket sizes. We could even see ticket sizes go down in inflationary times as card-present comes back. So as Al said, there’s multiple impacts from inflation. Net-net, it’s a positive for us. We have not seen any impact on discretionary spending that we can discern. If anything, discretionary spending, especially from affluent consumers and credit cardholders has been going up quite healthily. So in general, there isn’t any evidence impact — evident impact on inflation, but obviously, we’ll keep looking for it. (Visa Q2 2022 Earnings Call, 4/27/2022)

Visa executives have repeatedly said the company benefits from inflation pushing up ticket and transaction sizes

Visa’s CEO said that because “inflation typically lifts transaction size…historically, inflation has been positive for us.”“Al Kelly — Chairman and Chief Executive Officer: So there are — the inflation has some puts and takes on our business. Service fees and international fees are basis points on volume. So inflation typically lifts transaction size. But offsetting that, incentives are also tied to volume, so there’s some offset to that lift. Fuel prices go up. But then on the other hand, sometimes consumers tend to moderate their buying in times of large increases in gas to the degree that, over time, if it was to happen, the dollar was to weaken, that increases inbound cross-border flows and the US inbound corridor is one of our largest and higher-yielding corridors. Expenses for personnel and marketing, professional fees could go up. But I’d say two things and then ask Vasant to add anything he wants. So far, we’re not — as I said and I think Vasant said in his remarks, we’re really not seeing much impact that’s causing us any concern in our numbers. And then, the last thing I’d say, net-net, historically, inflation has been positive for us.”(Visa Q2 2022 Earnings Call, 4/27/2022)

Visa’s CFO: “there’s multiple impacts from inflation. Net-net, it’s a positive for us. We have not seen any impact on discretionary spending that we can discern.”Vasant Prabhu — Chairman and Chief Financial Officer: Yeah. Just to add to what Al said, I mean we clearly have seen — we’ve seen ticket sizes go up in the US, in particular, in Europe, but it’s not all inflation. Some of it is mix. It’s mix driven by the fact that the card-present transactions, which often tend to be smaller transactions, have not yet fully come back. It’s mix also because e-commerce transactions, even when you do everyday purchases, can be larger ticket sizes. We could even see ticket sizes go down in inflationary times as card-present comes back. So as Al said, there’s multiple impacts from inflation. Net-net, it’s a positive for us. We have not seen any impact on discretionary spending that we can discern. If anything, discretionary spending, especially from affluent consumers and credit cardholders has been going up quite healthily. So in general, there isn’t any evidence impact — evident impact on inflation, but obviously, we’ll keep looking for it. (Visa Q2 2022 Earnings Call, 4/27/2022)

Visa’s CFO: “So, to the extent that there’s inflation driving up ticket size, clearly, it’s beneficial to us.” “Vasant Prabhu — Vice Chair and Chief Financial Officer: Sure. In terms of inflation as it relates to our revenues, as you know, our service fees, cross-border, etc., are denominated primarily in basis points on ticket size. So, to the extent that there’s inflation driving up ticket size, clearly, it’s beneficial to us. When it comes to transactions processing, our fees are generally tied to number of transactions. Right now, of course, the size of the basket has gone up. Some of it is because of inflation. Some of it is because it’s just gone up through the pandemic. Some of it has to do with the fact that some of the smaller transactions you’ve got in a normal world like people going and buying themselves lunch at work or a cup of coffee, we’re losing some of those transit.” (Visa Q1 Earnings Call 2022, 1/28/2022)

Visa’s CFO: “So, net-net, I mean, we are a beneficiary of inflation.“  “Vasant Prabhu — Vice Chair and Chief Financial Officer: And so, that causes ticket size on a mix basis to go up, which will recover, and that will be good for our transactions business. And in general, when people are ordering in through e-commerce, basket sizes have tended to go up. So, the basket size increase we see now is partially inflation. Partially, it’s some elements like the ones I just went through. So, net-net, I mean, we are a beneficiary of inflation. And in terms of wage inflation, generally speaking, I mean, we expect some. Everybody is seeing it. But overall, I mean, it’s reasonable at this point, and we’ll update you, you know, as time goes by if it’s more than we expected.” (Visa Q1 Earnings Call 2022, 1/28/2022)

Visa’s CEO emphasized the ticket sizes also benefitted from the rebound of the “affluent segment” who “tend to have higher ticket sizes.”“Al Kelly — Chairman and Chief Executive Officer: No, I think it was a very complete answer, Vasant. The only other factor that you didn’t mention relative to ticket sizes is something I said in answering, I think, Darrin’s question that as the affluent segment, which is the segment that — whose spending went down the most during the pandemic, comes back in, obviously, they tend to have higher ticket sizes as well. So, there’s a number of factors that drive ticket sizes. Actually, getting to precision on causality and what the different weighting of those different factors are is virtually impossible.” (Visa Q1 Earnings Call 2022, 1/28/2022)

Visa’s profits have surged alongside inflation

Visa reported that its profits rose 21% alone in Q1 2022.“Payment processing giant Visa’s profits rose 21% in the first three months of the year fueled by a large jump in spending on the company’s namesake credit and debit card network. The San Francisco-based company reported Tuesday that it earned $3.65 billion, or $1.70 a share, in its fiscal second quarter that ended March 31. That was up from $3.03 billion, or $1.38 a share, in the same period a year earlier.” (Associated Press, 4/26/2022)

Visa’s profits were driven by increases in both the number and size of transactions on its network“Visa’s results were driven largely by a significant jump in the amount of money and the number of transactions that went through its payment network. The company processed $3.384 trillion in payments on its network last quarter, up 17% from a year earlier. Visa earns a fee from every transaction that uses its network.”(Associated Press, 4/26/2022)

Visa and Mastercard used their market control to increase fees on merchants who pass them onto consumers

March 2022: Visa and Mastercard planned to increase previously delayed fees on merchants that accept credit cards. “Visa Inc. and Mastercard Inc. are preparing to increase the fees that many large merchants pay when they accept consumers’ credit cards. The fee increases—delayed during the past two years because of the pandemic—are scheduled to kick in next month, according to people familiar with the matter and a document viewed by The Wall Street Journal.” (Wall Street Journal, 3/8/2022)

The Visa and Mastercard fee increases targeted online purchases, in-store retail, and supermarkets.“The Visa and Mastercard fee increases will apply to many online consumer credit-card purchases, according to the document and people familiar with the matter. A Visa spokesman said merchants can avoid the higher fees if they provide certain transaction data and use its token service that masks card numbers. Mastercard will also increase fees on more than a dozen in-store purchase categories, according to the document and people familiar with the matter. Small and midsize supermarkets will pay higher interchange fees on most rewards cards. In-store general retail fees will also rise.” (Wall Street Journal, 3/8/2022)

The bulk of retailers will see increased costs from the fee increases. Only an extremely narrow segment of merchants with a small overall transaction volume might benefit from the new fee structure, critics say. The bulk of retailers will see increased costs, which will trickle down to consumers already struggling to make ends meet amid the highest inflation in 40 years. (USA Today, 4/25/2022)

Visa and Mastercard control more than 70% of the credit card payment market, collecting a percentage of the total spent in transactions. “Processing fees, or ‘swipe’ fees, on credit cards are likely rising for millions of businesses, but whether this is a classic case of corporate greed at the expense of consumers depends on who you ask. Visa and Mastercard, the top two payment networks in the U.S. with more than 70% of the market, recently changed its fee structures for merchants who accept their credit cards for payments. The fees, charged every time a customer swipes a credit card, are typically a percentage of the total spent in the transaction.” (USA Today, 4/25/2022)

In 2021, Visa and Mastercard collected $55.4 billion in merchant fees, over double the number from 2012.“U.S. merchants paid card issuers an estimated $55.4 billion in Visa and Mastercard credit-card interchange fees in 2021, more than double the amount in 2012, according to the Nilson Report. They pass along at least some of these costs to the consumer in the form of higher prices. More merchants have started charging consumers extra when they pay with credit cards.” (Wall Street Journal, 3/8/2022)

Total processing fees collected by Visa and Mastercard rose from $27.7 billion in 2011 to $77.48 billion in 2021. ”As more commerce moved online during the pandemic, so did fraud,” it said. To see how much is at stake, total processing fees for all types and brands of cards were $137.8 billion in 2021, according to the Nilson Report, which provides news and analysis of the global card and mobile payment industry. That compares with $110.3 billion in 2020 and $65.1 billion in 2011. For Visa and Mastercard credit cards alone, 2021 was $77.48 billion, 2020 was $61.63 billion and 2011 was $27.7 billion.” (USA Today, 4/25/2022)

Democrats in Congress, led by Senator Durbin, have attacked Visa and Mastercard for fee hikes

Senator Richard Durbin accused Visa and Mastercard of profiting off inflation and held a hearing critical of interchange fee hikes. “In response to soaring inflation, Democrats have accused companies of raising prices disproportionately to increase profits amid demand and supply-chain bottlenecks. Visa Inc. and Mastercard Inc. came under fire at a Senate Judiciary Committee hearing for raising the transaction fees charged to merchants accepting their credit cards. Senate Judiciary Chairman and Majority Whip Richard J. Durbin, D-Ill., said the ‘interchange fees’ face too little competitive pressure and that increases are hitting consumers and businesses when they can least afford it. ‘We’re facing inflation. And the last thing the American people need is a higher swipe fee. I wish both companies had resisted the urge to make some money when they can,’ he told representatives from Visa and Mastercard.” (Roll Call, 5/4/2022)

Senator Durbin cited comments by Visa’s CFO that inflation was a net positive for the company. “Interchange fees are typically a percentage of the transaction cost, usually 1 to 3 percent. As prices go up with inflation, swipe fees do too, Durbin said, pointing to reports that Visa Chief Financial Officer Vasant Prabhu said on an earnings call that inflation had been a net positive for the company. ‘So let’s put to rest the theory that this has nothing to do with inflation,’ Durbin said.” (Roll Call, 5/4/2022)

Credit Card interest rates are reaching record highs at the same time that credit balances are surging

Credit card balances rose by $52 billion in the fourth quarter of 2021, the largest quarterly increase in 22 years of recorded data. “Overall, credit card balances rose by $52 billion in the fourth quarter of 2021, notching the largest quarterly increase in the 22-year history of the data, according to the most recent report from the Federal Reserve Bank of New York. Now, total card debt is on track to surpass pre-pandemic levels and hit an all-time record as soon as this summer, according to Ted Rossman, a senior industry analyst at CreditCards.com. “ (CNBC, 4/27/2022)

Most credit cards have variable rates with a direct connection to the Fed’s benchmark, so APR’s will rise as the Fed raises interest rates. “At the same time, the Federal Reserve has committed to raising interest rates to tame inflation, which is now running at its fastest pace in more than 40 years. Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit. Cardholders see the impact within a billing cycle or two.” (CNBC, 4/27/2022)

A 50 point hike by the Fed will cost consumers an additional $3.3 billion on interest alone. “If the Fed announces a 50 basis point hike in May, as expected, consumers with credit card debt will spend an additional $3.3 billion on interest this year alone, according to a new analysis by WalletHub. The average consumer has a credit card balance of $5,525, according to Experian, and pays an annual percentage rate of roughly 16.38%, which is cheap by historic standards but significantly higher than nearly every other consumer loan. (CNBC, 4/27/2022)

Analysts predicted APRs as high as 18.5% by the end of 2022.“With several rate hikes on the horizon, credit card rates could be as high as 18.5% by the end of the year, another all-time record, Rossman said. If the APR on your credit card rises to 18.5% from 16.38% in 2022, it will cost you another $885 in interest charges over the lifetime of the loan, assuming you made minimum payments on a $5,525 balance, he calculated.” (CNBC, 4/27/2022)

Most credit cards have fixed rates until the 1980s

Until the mid-1980s, most credit cards had fixed rates that were “immune” to prime lending rates controlled by the Federal Reserve.“Debt outstanding from all cards was $82 billion in 1980, compared to $287 billion last year. The variable-rate card eclipsed the fixed-rate card. ‘The vast majority of credit cards through the mid-1980s were fixed rates, which were immune to fluctuations in the prime lending rates or cost of funds,’ explained Robert McKinley, president of RAM Research in Frederick, which tracks the credit card industry. ‘We didn’t see variable rates until the mid-1980s, but today about two-thirds of cards are variable.” (Baltimore Sun, 9/2/1994)

The average credit card rate was 17.3% in 1980. “Credit cards have always held the highest loan rates, but they are particularly high right now when compared with other rates. In 1980, the average credit card rate was 17.3 percent, the discount rate charged on loans by the Federal Reserve was 11.5 percent and the prime lending rate was 15 percent. This year, with card rates averaging 17.34 percent, the discount rate is 3.50 percent and the prime rate is 7.75 percent.” (Baltimore Sun, 9/2/1994)