The fourth quarter numbers are out and although MasterCard showed a 23-percent increase in profits, when people reach for a card to use, more and more they aren’t reaching for a MasterCard. Instead they are reaching for a Visa Debit card. Visa’s focus in the debit card market is finally starting to pay off, will it continue?
Both MasterCard and Visa rely on usage fees (aka interchange fees) for profit, while offloading credit risk to the financial institutions they partner with. Typically debit fees are less than credit card fees as they require a pin number and therefore pose less risk associated with fraud. All this and more makes Visa’s fourth quarter numbers no surprise with a 33-percent increase in net income over the year-ago period.
Today, 62-percent of Visa’s volume is directly from debit transactions vs. credit and this number is still rising. With people continuing to switch to debit, merchants average interchange fees will decrease as profit margins increase even with less overall sales. This trend doesn’t seem to be changing if the last few months are any indicators. According to Visa, debit volumes grew 8 percent in the September quarter, and 19-percent in the December quarter. Credit volumes still pulling up from the negatives, grew 8-percent through both quarters. Visa is fully aware of the slow growth in credit and payments “for the forseeable future”. That being said, merchants can expect this to become the norm and should plan on strategies to help improve their numbers for debit use, such as debit card or cash discounts.
How will this help Las Vegas merchants? Using the Visa Interchange Rate Sheets and a fictitious merchant, (a small restaurant/coffee shop), this sample merchant could be saving from 22 to 49-percent on interchange fees by encouraging debit transactions. How much is this really? Well, depending on volume, it could be the salary of at least one part time employee per month. Now do you see why not only merchants are sitting up and taking notice?
With last weeks announcement of the Ritz-Carlton Lake Las Vegas closing in May (the first Ritz to close ever by the way, according to the Wall Street Journal), what sort of effect will this trend have? What type of merchant will be affected? Obviously the type that accepts debit cards. According to Visa, it benefits more from purchases made on things like groceries, gas, and recurring bill pay items. This trend might also be related to the public’s negative perception of credit cards and therefore consumers are turning to debit cards in order to have more control or perceived control over their finances.
What card do you pull out of your wallet?
For more info: MasterCard, Visa