4Q RESULTS: Why Visa Outshined, and How MasterCard Is Fighting Back

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Byline: Sara Lepro

For today's consumers, there's nothing like cash on the barrelhead - and that's giving Visa Inc., with a stronger debit card foothold than MasterCard Inc., an advantage in the competition for card transactions.

Visa's overall U.S. payments volume grew in its fiscal first quarter, which ended Dec. 31; MasterCard's volume declined from a year earlier in the corresponding period (though it grew slightly from the previous quarter). Visa's margins expanded; MasterCard's shrunk. Visa's profits trounced analyst estimates; MasterCard's missed them.

MasterCard isn't just sitting tight.

The company is making a concerted effort to acquire a bigger slice of the rapidly growing debit market. But that means spending more money to offer rebates and incentives to bank customers - a reason for the margin compression.

"If you look at the differences between the two, it boils down to debit card market share," said Red Gillen, senior analyst at Celent, a Boston research firm.

"The market is saturated," Gillen said. "It's a zero-sum gain in debit. It has been for years, and this is the challenge that MasterCard faces."

Spending on Visa-branded debit cards in the U.S. during the final three months of 2009 jumped 15% from the year-ago period, to $238 billion. That compares with $85 billion in debit card purchase volume at MasterCard, which was up 10% from the fourth calendar quarter of 2008.

Total purchase volume at Visa, which includes credit and debit cards, rose 7.2% from a year earlier, to $438 billion. That was an improvement over the quarter that ended Sept. 30, when the San Francisco company's payment volume in the U.S. dipped 1% year over year, to $417 billion.

But at MasterCard, total purchase volume was still down in the U.S., dipping 1.3% from the fourth quarter of 2008, to $207 billion. However, the decline slowed from a 7.4% year-over-year drop in the third quarter when the Purchase, N.Y., company's purchase volume was $202 billion.

The debit market "is holding up much better than the credit market," said David Parker, an analyst at Lazard Capital Markets. That is clearly setting Visa apart, he said.

Visa's net income jumped by a third in its fiscal first quarter, which ended Dec. 31, to $763 million, or $1.02 a share. That handily beat the average per-share estimate of 91 cents from analysts polled by Bloomberg.

Total revenue, which includes international transaction and data processing revenue, rose 13%, to $1.96 billion.

The solid results led Visa to issue a more optimistic outlook for 2010. Visa now expects revenues to grow 11% to 15% this year. Previously the company said growth would be more toward the low end of that range.

Some analysts, though, say Visa is being too conservative in its guidance.

"We believe that, absent a double-dip recession, spend growth should continue to accelerate, driving revenue growth above the high end of management's guidance," Bruce Harting of Barclays Capitalwrote in a research note.

Harting raised his 2010 and 2011 earnings estimates on the company, and upgraded the stock to "buy."

MasterCard, meanwhile, said its net income rose 23%, to $294 million, or $2.24 a share, from $239 million, or $1.83 a share, a year earlier.

The fourth-quarter results included an after-tax severance charge of 19 cents, the company said. …