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Wednesday, 11 November 2015 09:32
Visa Inc may increase Europe acquiring prices
Pressure likely from shareholders after Visa Europe acquisition

Visa Inc's acquisition of Visa Europe business may have the side effect of an increase in the prices it seeks to charge to acquirers.

Visa Inc is a far more lucrative business than Visa Europe and the planned Eur21.2bn purchase may cause Visa Inc shareholders to insist on greater profitability in Europe.

Visa Inc posted Q4 profits of US$1.51bn and earnings of 62 cents per share, up from US$1.36bn, or 54 cents a share in the same period in 2014. For the full year the company made a profit US$6.3bn, 16% up on the previous fiscal year.

In contrast, for the calendar year 2014 Visa Europe made a profit of just Eur344m (US$369.6m). Europe makes less money than other regions due to the preponderance of debit transactions over more lucrative credit cards, and also because of the existence of domestic processing switches in Europe, whilst in other regions most domestic transactions are switched by the schemes.

Since the profitability of Visa Europe is so far below that of Visa Inc, merging the two together will decrease the profitability of Visa Inc which will have an impact on the Visa Inc share price.

"The elasticity of cost reductions is limited, therefore the only other way out [for Visa Inc] is to increase the revenues," says payments consultant Leon Dhaene, an analyst on the payment business for large venture capital companies and independent expert at the EC's Payment Systems Market Expert Group (PSMEG). "Given that we do not expect those to come from large new business volumes, which are mostly being taken by new market entrants, additional revenue can only come from increased pricing."

Visa may seek to balance the profit loss by cutting costs in Europe and raising European fees. One way of doing this would be to change the balance of cost between issuers and acquirers. In terms of the total switching cost of a transaction, Visa in Europe makes the issuer pay about 60% and the acquirer about 40%. Dhaene says that with the European regulator dramatically cutting issuer revenues (via the Multilateral Interchange Fee Regulation), a number of payment schemes are now looking at changing that balance, whilst “slightly” increasing their overall income on a transaction. 

"What I suspect will happen it that, under pressure from the issuers, Visa will move more charges onto acquirers," he adds.

Visa could also increase certain processing, operating, or system fees, without offering any new kind of functionality or without increasing significantly performance.


Dhaene adds that such increases in pricing could bring Visa into further conflict with European regulators, following the longstanding battles with Visa Europe and MasterCard over interchange and payment scheme costs.

"European legislators will definitely want to look at this deal," he says. "The last payment scheme controlled by the European banks is now being acquired by a US-based, commercially owned company. This makes a duopoly in the card payment business in Europe a fact."

He adds that Visa and MasterCard's dominant position in the European market, means that both national and European regulators will be watching closely how their business evolves.

Reasons for the sale
One of the interesting aspects about the Visa Europe sale is why it is taking place now after being resisted for so long. Previously banks had wanted to remain as a European bank-owned association to stay out of the clutches of powerful US regulators and the potential costs of ongoing merchant interchange cases in the US.

However, European banks were hit by the banking crisis and many needed government rescue packages, and Dhaene says that these governments, driven by the European Commission, are now pushing for such "public" banks to divest as many of their saleable assets they can. Shareholding in Visa Europe is one of those assets: "Based on our calculations for interested venture capital companies, we estimate the value of Europe somewhere between 16 to 20 billion euro. 

"The lower end of this equation has a lot to do with the fact that the major payment schemes are bound to lose out on share to new market entrants, some of which are promising fintech companies, whilst the business increase of their traditional products is flattening and will be expected to dive under 5% increase by 2020."

He says a further reason for the sell-off is that banks are looking to freshen up their balances in light of the Basel III regulations on risk management and capital adequacy, and by selling their shares in Visa Europe they can fill in the gaps. 

This week the Financial Stability Board (FSB), which coordinates bank stability regulation across the G20 economies, said that the Top 30 global banks might be required to keep 18% of their assets in capital and corporate bonds by 2022 to meet new financial stability requirements introduced in the wake of the 2008 financial crisis. This means that under a worst case scenario, the 30 biggest banks
(such as HSBC, Barclays, ING, BNP Paribas, Citigroup and UBS) might have to issue a total of Eur1.1 trillion in bonds between them.
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