SAN FRANCISCO (7/26/12)--Visa is adding $150 million to a litigation escrow by converting some of its Class B shares held by credit unions and banks to help fund its share of liabilities in the aftermath of a proposed $6.05 billion settlement announced earlier this month. The move will affect credit unions, but should not have a major impact.
"My sense is there is an impact on credit unions, but not a major one," Scott Waite, senior vice president/chief financial officer for Patelco CU in Pleasanton, Calif., told News Now. Waite also is the Credit Union National Association's accounting subcommittee chair.
Visa, MasterCard and several large banks, defendants in a lawsuit brought by groups of merchants and their trade associations, on July 13 agreed to pay billions to merchants to settle a long-standing credit card interchange fee class action lawsuit. In addition, the settlement requires a reduction in credit card interchange rate fees (IRF) of 10 basis points for an eight-month period, likely beginning in mid-2013 (News Now July 16).
The rate reduction applies to all card issuers, including credit unions. Visa's newest deposit elevates the amount in its escrow fund to $4.4 billion--which is its share of payments to be given to merchants under the terms of the pending deal.
Created as part of Visa's 2008 initial public offering, the escrow is tied to its Class B shares held by credit unions and banks that issue cards for the payment network. Those financial institutions are responsible for providing funds for the account, which protects Visa's Class A shareholders from liability.
VISA intends to take a $4.1 billion charge for the second quarter to formally reserve its part of the deal, which still needs court approval.
There are essentially three areas of impact, Waite explained.
The first is that there will be a 10-basis-point reduction in credit card interchange income. Visa's move will impact credit cards, not debit cards, Waite emphasized. "Credit unions probably see more purchase volume on debit than credit because most members use debit cards," he added.
So if a credit union has $10 million per month in purchase volume, with the reduction taking place for eight months in 2013, once the settlement is finalized, there would be $80 million in purchase volume with a loss of $80,000 in interchange income ($80 million x 10 basis points = $80,000 in loss of revenue for a credit union), he said. Most earn over 1.35%, so they still would recognize $1 million net in income on the purchase volume.
The second impact: There's further erosion in the conversion rate of the Class B stock that credit unions own. "Credit unions have that stock, but they can't get their hands on it until Visa is done with the litigation," Waite explained. "So credit unions cannot cash out until 2015."
Currently credit unions' Visa Class B stock redemption rate is valued at 42.5%. The $150 million that Visa is converting and putting into escrow will further reduce that percentage, Waite said. However, the litigation escrow account already has $4 billion-plus in it. That amount over the past few years is what had driven the redemption rate to 43% from 100%. So 57% already has been devalued because it's in the litigation escrow, Waite said.
"So the additional $150 million on top of the $4 billion already there won't drop the conversion rate much more--from 42.5% to 42%," he added. "Visa hasn't announced the official number yet, but it will be announced soon. The upshot is the value of the Class B Stock-- once credit unions get it--will be worth less."
The third impact is that the remaining value of that Class B stock still can be used for future litigation settlements--until this particular litigation has been resolved or until any other pending litigation has been resolved, Waite said.
"The big picture is we have to continue to wait and see what the stock will be worth, if anything, in the end," he concluded.