A rise in card use helped MasterCard Inc. (MA) post a 21.2% increase in first-quarter profit.
The Purchase, N.Y.-based payments company also said its revenue grew 17.1% to $1.76 billion, beating analysts' expectations.
The results were "driven by an increase in processed transactions" and represented the "highest quarterly growth rate since" MasterCard's initial public offering in 2006," Ajay Banga, president and chief executive officer of MasterCard, said in a statement Wednesday.
MasterCard and bigger rival, Visa Inc. (V), operate payments networks that help facilitate credit- and debit-card transactions for banks. They do not lend to consumers but provide services to banks that issue their cards and those that perform processing for merchants.
The companies have continued to perform well this year despite U.S. regulation that affects debit-card processing and concerns over softening in foreign markets, thanks in large part to consumers' ongoing shift to electronic payments from cash and checks.
But as growth prospects in the U.S. market begin to shrink thanks to the saturation of card payments, MasterCard and Visa have been bulking up their efforts to infiltrate emerging and underdeveloped countries where use of plastic is small or non-existent.
MasterCard said operating expenses increased 14% to $758 million, though excluding the effect of foreign currency, they increased 15%, driven primarily by higher general and administrative expenses.
MasterCard's shares, which have risen more than 22% this year, were down 2.99% at $442.25 in pre-market trading Wednesday.
Its profit of $681 million, or $5.36 per share, compared with a profit of $562 million, or $4.29 per share, a year earlier. Analysts polled by Thomson Reuters were expecting earnings of $5.29 per share on $1.73 billion in revenue.
The results were buoyed by a rise in payments volume transacted over its network.
Purchase volume on MasterCard cards increased 16.8% to $629 billion. Processed transactions increased 29% to 7.7 billion, and cross-border volume, which is more lucrative for MasterCard because they typically carry higher fees, was up 18%, suggesting foreign-travel spending is holding steady.
The payments industry was shaken up last year with the introduction of new rules that cap how much big banks can charge merchants each time a consumer swipes a debit card. Those fees, called interchange, are set by Visa and MasterCard but collected by card-issuing banks, including Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), as revenue.
MasterCard and Visa are continuing to adjust to the rules, which were part of 2010's Dodd-Frank Act. A separate provision in the rules that took effect April 1 requires banks to include multiple processing networks on their debit cards as a way to give merchants more control over their costs.
In the past a bank might have used Visa to process debit-card transactions authorized with a consumer's signature and Visa's Interlink debit network to authorize transactions made with a personal identification number, or PIN. Such deals are no longer allowed, meaning that same bank must either add a PIN debit network not operated by Visa to its cards or replace Interlink entirely with a different provider.
The requirement is expected to have a bigger effect on Visa, which had more exclusive arrangements with its bank clients than MasterCard, while potentially giving a slight boost to MasterCard, which has a significantly smaller share in the debit-card market.
"From our recent checks, we continue to hear that MasterCard is winning share in PIN debit, which could positively impact transaction volumes," David Koning, an analyst with Baird, wrote in a research note last week.
The company has "significantly improved our position in debit" and now has the "capability to process transactions on about half of all U.S. debit cards," Banga said.
Investors are closely watching the companies' efforts to protect or grow their market share, which include paying rebates and incentives to merchants to win their business and price changes, particularly by Visa, that directly affect the banks that contract with merchants, known as merchant acquirers.
MasterCard said the benefits of increased transaction volumes were partly offset by an increase in rebates and incentives stemming from "new and renewed agreements" as well as higher volumes.
Another cloud that looms over the companies is a series of more than 50 lawsuits filed by merchants including Kroger Co. (KR), Payless ShoeSource and Safeway Inc. (SWY) and several trade groups. The suits, which also name several large banks that issue Visa and MasterCard cards, take aim at the so-called swipe fees retailers pay on credit-card transactions.
Visa and MasterCard have been working toward a settlement of the suits, which are set to go to trial in U.S. District Court in Brooklyn in September. Analysts have pegged the value of a possible settlement at $6.5 billion based on recent actions by Visa and MasterCard.
MasterCard took a $770 million pre-tax charge in the fourth quarter based on progress made in the suits. Visa said in December it was depositing $1.6 billion into a litigation escrow account set up to pay for a settlement, bringing the total in the account to about $4.3 billion.
Executives for both companies have said they would not agree to any long-term cut to credit-card swipe fees, though analysts expect the fees could be reduced temporarily as a result of a settlement. In addition, they also expect Visa and MasterCard to eliminate some of the rules they impose on merchants, including one that prohibits surcharging customers who pay with plastic.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; email@example.com