As cash-strapped US consumers think twice before buying a coffee or a newspaper, and banks fight for survival, Visa Inc and MasterCard Inc are cutting costs to sustain earnings.
In their latest quarterly results, the world's largest payment networks beat expectations by slashing expenses and increasing prices.
That contrasts with previous periods when the companies could rely more for growth on people switching to electronic payments from cash for an increasing number of transactions.
That trend had Mastercard and Visa in the sweet spot of the credit and debt card industry - getting paid each time a transaction took place on their branded cards while not having to deal with the risks of consumers defaulting that are faced by the credit card issuers.
Rising defaults have led to mounting charges for the issuers, such as Citigroup Inc or Bank of America Corp, which are major clients of Visa and Mastercard. American Express is both an issuer and a payments company.
Governments around the world have bailed out many of the battered banks, making it more difficult for the credit card-payment networks to raise the prices they charge them for transactions.
“Most likely, the bottom line will benefit from cost cuts (rather) than growth in volumes,” said Michael Kon, an analyst at Morningstar.
Visa's payment volume growth slowed to 12% in the latest quarterly report from 15% in the quarter before, while MasterCard's volume increased at only a 3% rate from 14%.
The global deterioration of the economy and the strengthening of the dollar, which hits dollar revenues from overseas, forced Visa and MasterCard to cut their revenue growth outlook for 2009.
MasterCard's Chief Executive Robert Selander said in a February conference call with analysts that worldwide process revenue was flat in January, and if that trend continued it would be a challenge to get high-single digit revenue growth.
Still, the company forecast an average annual net income growth of 20% to 30%, while Visa estimated annual adjusted diluted Class A common earnings per share growth of 20% or more.
They plan to get those returns through cost cutting. MasterCard slashed expenses 16% in the fourth-quarter; Visa trimmed costs 4% in its fiscal first quarter.
“The companies have not been run very tightly and there is room to cut,” said Standard & Poor's analyst Stuart Plesser.
Visa, which slashed expenses as part of a restructuring plan to integrate the former US, Canada and international operations into one company, has accelerated the pace and expects to finish that plan - which will save $300 million in 2009 - a year earlier than expected.
“As the economy moved into negative territory we, as a management team, began to accelerate our efforts to globally integrate these businesses,” said Visa's CFO Byron Pollitt in an interview.
MasterCard, which increased expenses by 3% last year as it hired employees and contractors, was now cutting travel expenses, capping hiring, and cutting advertising.
“We have the need to cut costs,” Mastercard's Chief Financial Officer Martina Hund-Mejean said in an interview.
Investors and analysts said both companies have room to cut marketing and advertising, which account for around one-third of their expenses, by 20% without suffering any impact.
“If consumers are not spending, and banks are not lending, there is no reason to invest in marketing,” said Morningstar's Kon.
Sponsorships are on the chopping block. Pollitt said Visa was committed to support the FIFA World Cup, and the Olympic Games, but withdrew its support from the Rugby World Cup.
MasterCard is reviewing its support to other events in the United States and the United Kingdom, said Hund-Mejean.
Both credit card executives, who believe that cash is their main competition, were confident that the expansion of electronic payments in emerging markets would drive growth, despite the global economic crisis.
Analysts are more skeptical and said further cost cut might be needed if the recession continues. (Reuters)