Welcome to Visa Inc.'s fiscal Q2 2013 earnings conference call. All participants are in a listen-only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mr. Jack Carsky, head of Global Investor Relations. Mr. Carsky, you may begin.
Thank you. Good afternoon and welcome to Visa Inc.'s fiscal second quarter 2013 earnings conference call. With us today are Charlie Scharf, Visa's Chief Executive Officer, and Byron Pollitt, Visa's Chief Financial Officer. This call is currently being webcast over the Internet. It can be accessed on the investor relations section of our website at www.investor.visa.com. A replay of the webcast will also be archived on our site for the next 30 days. A PowerPoint deck containing highlights of today's commentary was posted to our website prior to this call. Let me also remind you that this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements do not guarantee the future performance, and as a result of a variety of factors, actual results could differ materially from such statements.
Additional information concerning these factors is available in the company's filings with the SEC, which can be accessed through the SEC's website in the investor relations section of the Visa website. For historical non-GAAP or pro forma related financial information disclosed in this call, the related GAAP measures and other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying our fiscal second quarter press release. This release can also be accessed through the IR section of our website. With that, in contrast to what has been our historical pattern, I'll now turn the call over to Byron.
Thank you, Jack. Let me begin with my usual call-outs and observations. First, Visa's 15% net revenue growth in fiscal second quarter was once again broad-based, as we continue to see strong credit and debit growth in the U.S. and rest of world, which is now supported by a return to positive growth in our aggregate U.S. debit business. Second, client incentives for the quarter as a percentage of gross revenue were 16.1%. Similar to last quarter, this was a result of lower than expected deal activity. However, for the balance of fiscal 2013, we expect lower incentive levels than originally projected. The new 10-year deal structure with Chase has the effect of simultaneously reducing both gross fees and revenue incentives, with one largely offsetting the other.
This contractual change, which is now signed and in effect, in combination with deal timing and revenue mix, have caused us to lower our full-year client incentive outlook from 18%-18.5% down to 16%-17% for fiscal 2013. Third, aggregate U.S. debit payment volume growth turned positive in the fiscal second quarter of 2013 versus a negative 3% in the fiscal first quarter. Of note, the month of March saw the onset of a significant positive inflection point as we lapped last year's adoption of the Dodd-Frank routing rules for U.S. debit. While Interlink payment volume growth was in negative mid-teen territory, Visa Debit payment volume saw a 12% rate of growth. Fourth, as a result of a more certain revenue outlook and earlier than planned share repurchases, we are increasing our fiscal 2013 EPS guidance from high teens to around 20%.
Lastly, as we remain committed to returning excess cash to our shareholders, and to this end, during the quarter, we spent $1.8 billion to repurchase 12 million shares at an average price of $157. This means through the first two fiscal quarters, we have spent $3.1 billion to repurchase 20 million shares at an average price of $152. As we begin the fiscal third quarter, our remaining open to buy stands at $1 billion. Now let's turn to the numbers. As is our practice, I will cover our global payment volume and process transaction trends for the fiscal second quarter, followed by our results through April 28th. I'll then cover the financial highlights of our fiscal second quarter and conclude with our guidance outlook for the balance of fiscal 2013. The payment volume growth rates which follow are unadjusted for the leap year in 2012.
Normalizing the month of February would add about one percentage point of growth to the second quarter's results. Global payment volume growth for the March quarter in constant dollars was 9%, on par with the December quarter's 9%. This was driven by a sustained growth in all of our regions, including the U.S., which saw some incremental benefit from the early lapping effects associated with U.S. debit regulations. More recently in the U.S., through April 28th, payment volume growth was 12%, compared with 4% in the March ending quarter. U.S. credit growth held at Q2 levels, while debit experienced improved growth rates. Global cross-border volume delivered a solid 10% constant dollar growth rate in the March quarter, which compares to 11% rate in the December quarter. The U.S. grew 9%, and the rest of world, 11%.
Through April 28th, cross-border volume on a constant dollar basis grew 10%, with a U.S. growth rate of 7, and the rest of world at 12. Transactions processed over Visa's network totaled 13.9 billion in the fiscal second quarter, a 6% increase over the prior year period. The U.S. saw a 3% increase in transactions, while the rest of world delivered 21% growth. Through April 28th, processed transaction growth was a positive 15%, driven in part by the lapping of the U.S. debit routing regulations. Separately, CyberSource reported 1.6 billion transactions for the period, a 25% increase over the prior year. Turning to the income statement. Net operating revenue in the quarter was $3 billion, a 15% increase year-over-year, driven by solid growth in global payment volumes, data processing revenues, international revenues, and, as mentioned earlier, lower than anticipated client incentives.
Hedging resulted in no meaningful foreign exchange impact on net revenue in the quarter. Moving to the individual revenue line items, service revenue was $1.4 billion, up 10% over the prior year period. Revenue growth was in line with constant dollar payment volume growth. Data processing revenue was $1.2 billion, up 25% over the prior year's quarter, based on solid growth rates in Visa processed transactions inside and outside the U.S., strong CyberSource transaction growth, as well as strategic pricing actions taken last year related to the restructuring of our pricing in the U.S. debit market. International transaction revenue was up 13% to $831 million, reflecting solid strength in cross-border volumes. As I highlighted earlier, client incentives as a percentage of gross revenue for the quarter came in at 16.1%, lower than we had anticipated on a percentage basis due to the timing of deals in the quarter.
Looking forward, the change in pricing structure related to the Chase contract, in combination with deal timing and revenue mix, now suggests full-year client incentives in the 16%-17% range. Total operating expenses for the quarter were $1.1 billion, up 13% from the prior year. This was primarily due to higher costs associated with investments in our growth strategies. The rate of operating expense growth should slow in the second half. Marketing expenses were up 15%, primarily due to a low spend level in the prior year, largely related to the timing of the London Summer Olympics. Spend will step up in the fiscal third and fourth quarters as we increase marketing to support a number of campaigns, including the FIFA Confederations Cup in South America. Operating margin for the quarter was 63%.
While slightly ahead of our full-year guidance of about 60%, this margin level is consistent with how we plan for the year. Our effective tax rate for Q2 was 31.6% and is fully consistent with our full-year guidance of 30%-32%. Net income at $1.3 billion was up 17% over prior year adjusted results. Fully diluted EPS was $1.92 for the quarter, up 20% over prior year adjusted results, due in part to a strong commitment to return excess cash in the form of share repurchase. As noted earlier, our full-year adjusted EPS guidance is now around 20%. Finally, capital expenditures were $111 million in the quarter and continue to be in line with our full-year expectations. The weighted average number of fully diluted shares for the fiscal second quarter totaled 660 million.
Other than the changes to our client incentives and diluted earnings per share growth, all other outstanding guidance remains the same. With that, I'll turn the call over to Charlie.
Thanks, Byron. Good afternoon, everyone. We're happy with our continued strong performance. As Byron walked us through, it was strong growth across the world. Economic uncertainty does remain, but our business model continues to prove itself through all environments. Growth rates, as Byron had mentioned, have continued through April, which makes us feel quite good. We continue to build on some exciting partnerships around the world, both traditional and involving emerging technologies. Just a few important examples of these I want to mention. We executed a multi-year co-brand renewal with Southwest Airlines, one of our largest co-brands in the U.S. We've talked about V.me before. We now have 82 U.S. issuers who have agreed to participate. We have more than 180 merchants signed, 20 of which are top 100 internet retailers. There are 37 merchants live today and more coming online as we talk.
During the quarter, we also announced a broad-based partnership agreement with Samsung, covering Visa's payment capabilities on Samsung devices. Samsung phones will be preloaded with Visa PayWave for contactless payments and the Visa Mobile Provisioning Service to securely download payment account information to NFC-enabled Samsung devices. These are just a couple of examples of some of the most important things that we executed in the quarter. I want to turn and talk for a second about Europe. There's been a lot of discussion about a couple of items, so we thought we would walk through each of these one by one. First of all, let's just talk about our relationship with Visa Europe and the put. I guess I would say is we've read what you've read. We do not know what they'll do. Just as a reminder, they have a put, so it's their decision.
We do not have a call. The way we think about it, they have three options relative to our relationship. They can keep our relationship as is. They can exercise the put. They could propose an alternative which is different from the put. If they choose to exercise the put, there's a clearly defined process for that. If they were to propose something other than put, we would consider it. If so inclined, we would negotiate it in normal course. The process of the put would not apply. It was clear when I got here that we're always prepared if they choose to exercise the put to go through the process and have our points of view on that.
Having said all that, we believe that we compete effectively now. There certainly are clear benefits over the long term to be one company. I've talked about that before. I think it's true both for Visa Inc. as well as for Europe. They need to come to that conclusion themselves. I think the most importantly in all this is we're prepared to compete regardless of the structure, regardless of which avenue they go down. If the situation changes, we'll obviously report back. As of now, what you read are the facts, I believe. The second issue is the EC inquiry. They are investigating intra-European credit interchange rates and interregional credit interchange rates, which is where a non-European cardholder uses their card within Europe. They're also investigating certain MasterCard rates as well.
If the EC ultimately challenges Visa and MasterCard's conduct, we expect that it would seek to prohibit Visa and MasterCard from setting default interregional interchange rates at their current levels. In addition, the EC is investigating honor all cards, no surcharge rules, as well as the practice of blending merchant fees. We're in discussions with the EC and have nothing to report yet. There is a disagreement to the extent Visa Europe has an obligation to indemnify Visa Inc. on this issue. We're confident in our position that Visa Europe is obligated to indemnify Visa Inc., and we're engaged in conversations with them to resolve the matter. Let me move and just quickly cover two regulatory and litigation items that you're all aware of. The first one is the MDL. The deadline for the opt-outs is May 28th, and we're confident that the judge will approve the settlement.
On the Department of Justice, there is no update. We remain comfortable our actions are appropriate. Let me move on now and just harken back to the last quarter's earnings call. On that call, I talked about our need to become more flexible and the need to work more closely with merchants, and I'm going to talk a little bit more about this. Just a reminder, as we think about our opportunity, we believe the number one opportunity for us is to move transactions from cash onto our electronic platform. We're confident that our assets are of the quality and the scope that we believe we would get our fair share of transactions in the process. This really is about moving transactions away from cash. Our focus is on helping issuers remain competitive at the point of sale.
The ecosystem is evolving, and we need to evolve as well to make sure we remain competitive at that point. To that end, we're evolving our rules. We've also aggressively continued to invest in new capabilities that we think will benefit everyone in the payments value chain. An important example of this was effective February 1st, we modified one of our rules to enable issuers and merchants to differentiate at the point of sale. This could take form in a whole series of things, but it could include things such as discounts, offers, or incentives.
We like this change because it creates an environment where all four parties, consumers, issuers, acquirers, and merchants, now have the ability to work together to create the most robust experience for all, and all four parties will now be able to work together to use our network to help us grow Visa payment volume. The rule we had in place did not allow that to happen. There's been a lot of talk about the Chase contract, and the Chase contract, in reality, is just one example of giving our issuers and acquirers an opportunity to create an environment to actually do what we just talked about, which is deliver more value to merchants and consumers. We included a slide, but I thought I would walk through exactly just what it is. First of all, it's a 10-year renewable partnership.
As part of this, we will create a distinct custom platform within VisaNet for the processing of their transactions, which I believe they're referring to as Chase Merchant Services or CMS. This image of Visa's authorization clearing and settlement system will be licensed to them exclusively for their use. The Chase transactions will still originate from the Visa-branded card, but will be processed in one of two ways. The first way would be just as happens today. The second, if the card is used at a merchant with whom Chase has a direct agreement for CMS, the transactions will be processed over the platform provided for them by us. Visa branding on the cards and at the point of sale remains the same.
The CMS platform is customizable, but the transactions will continue to meet our safety, security, and soundness standards, and we can offer similar functionality to any other Visa client. Visa retains ownership and control of its technology and intellectual property, which is obviously critical for us. Chase, like any other issuer today, can negotiate interchange directly with merchants, whether the transaction is processed through CMS or VisaNet. Not sure that this is well understood that issuers have the ability to do this today, but they do in fact have the ability to do it. Chase and the other merchants will continue to have the ability. The pricing levels and mechanics for our deal with Chase are consistent with what would be available to clients of Chase's size and scope who are making a 10-year commitment.
Obviously important for us, we, Visa, will gain additional consumer credit and debit volume. Looking ahead, we will continue to develop new capabilities and enhancing our business practices because we want to help issuers, acquirers, and merchants of all sizes work more closely together to take full advantage of the opportunities emerging across the industries. To that end, we are in active discussions with other partners on ways to use our network to help them differentiate. If clients are interested, we're willing to pursue customized arrangements that make sense for their own business needs. We will adhere to certain core Visa principles, which is the manner in which we'd approached the Chase arrangement. Just a few of these would be, number 1 is it would have to support the Visa brand. It would have to support our safety, soundness, and security standards that we maintain.
We would have to maintain control over the IP. We would have to continue to enable clients of all sizes to compete in the marketplace. Probably most importantly, whatever we do would have to add value to the Visa network. The bottom line is we believe that our approach here, relative to Chase and our approach with all issuers, acquirers, merchants of all sizes, are steps that are good for the electronification of payments, good for all of our partners, and therefore good for us. There's a lot more we could talk about, but we do have planned for you all a complete strategic update at our investor day scheduled for June 6th.
At that meeting, we intend to cover plans for what we're doing both in the developed and the emerging economies, we intend to focus a lot on e-commerce, mobile solutions, and what we're doing in the technology space in general. We'll leave a bunch of the discussions for that since we'll have plenty of time. With that, I think we will stop, and we'll open the call to questions.
If you would like to ask a question, please press star one and clearly record your name. You will be announced prior to asking your question. To ensure all questioners are heard, we ask that you limit your question to one. Once again, to ask a question, please press star one. To withdraw your question, please press star two. One moment for our first question. Our first question comes from Moshe Orenbuch of Credit Suisse. Your line is open.
Great. Thanks. I think the revenue performance, obviously, very strong. I was just wondering if you could talk about how you see that progressing. Obviously, it sounded like the incentive that you were talking about was lower incentives in the current period. Can we take away from that that you're actually seeing a better combination, if you will, of volume coming out of debit and some of the pricing actions that you've taken?
Let me respond to that. First, just to be clear on the incentive piece. A large contributor to the reduction in the incentive guidance going forward, and to a certain extent this quarter, when we signed the Chase agreement, it restructured how we priced so that, as I said in my opening remarks, gross fees are coming down along with incentives, and it's largely an offset. While incentives for the balance of the year are expected to come in in that 16%-17% range, that in and of itself is not a significant contributor to the revenue performance for the balance of the year because we haven't changed our overall revenue guidance.
We're well-positioned within the low double-digit range, and what we're seeing underlying that is a strong, sustained performance globally with two quarters now under our belt. Because of our quarter lag, remember that we actually have visibility to three quarters of service revenue. We have a much higher degree of certainty of how the year will flow out.
Given the strength we're seeing outside the U.S., good sustained recovery in our U.S. debit business, as you've pointed out, and particularly as we enter into the April-May-June quarter, this will anniversary the Dodd-Frank routing rules. Notice I said Dodd-Frank, not Durbin. While the debit business in the U.S. has sustained a meaningful loss, particularly in the Interlink, we're pleased with the way that our mitigating strategies have unfolded and the way the business has been recovering over the past several quarters.
Our next question will come from Craig Maurer of CLSA. Your line is open.
Yeah, good evening. Quickly, I was wondering if you could address any material pricing differences between Visa Inc. and Visa Europe that would have to be overcome should the put be exercised. Although I know it doesn't materially impact your top line, I was wondering if you could just clarify what's going on with the cash volumes in Latin America that seem to be off dramatically. Thanks.
The pricing approach that Visa Europe pursues is one that's still very much based on a bank-owned membership arrangement. It's different than what we have here in the U.S. or for Visa Inc. globally outside of Europe. Having said that, Visa Europe still must price to be competitive with other competitors like MasterCard in that arena. We've not done a detailed analysis of what the comparisons are. There is a presumption that to be competitive, you have to price competitively. We consider Visa Europe very competitive in that part of the world. Don't really have a comment on that. With regards to the cash volumes in Latin America, don't have a comment on that either. That's one we'll have to take a look into, and we'd be happy to get back to you through IR.
Let me just add to Byron's response on the Visa Europe question. As I said in the remarks, there's a very defined process that we would go through with Visa Europe where we look at the sustainable earnings power of the company, and I would presume a big part of that discussion would be what the sustainable revenue contribution would be as the model evolved. There's plenty of time through that process to have that discussion with them if we get to that point.
Our next question will come from Bill Carcache of Nomura. Your line is open.
Thanks. Good evening. Between about $1.8 billion of buybacks and over $200 million in dividends, it looks like your payout ratio was about 160% this quarter or thereabouts. As we look ahead, would final approval of the merchant litigation influence your mindset or attitude regarding capital return, perhaps just making you feel like you have a bit more flexibility there?
The answer is no. We began life as a public company committed to return excess cash to shareholders. We have done that aggressively over 5+ years. Every time there was an opportunity to, in effect, put money into the escrow on behalf of the U.S. bank shareholders and do that in a way that had the effect of a share repurchase, we did that. Had that money not gone into the escrow, I'm fairly confident in saying that we would have ended up buying back in the open market those shares. Just a final point, you mentioned the buyback and the dividends for the period. If you think about our commitment in the following way, I think this underscores our commitment to return. We have guided to $6 billion of free cash flow for the year.
Roughly $1 billion of that 6 will be generated in offshore in ways that we would not bring back to the U.S. and subject it to taxes, at least any time in the near future. That leaves $5 billion. We have authorization to repurchase a little over $4 billion for the year, of which we have basically bought back through the first 6 months, $3 billion of the $4 billion. If you take 4 full quarters of dividend payments, you're approaching $1 billion. If you add the share repurchases at $4 billion to the dividends of $1 billion, you get $5 billion of the $6 billion of free cash flow in effect returned to shareholders, and the $1 billion that isn't is offshore.
Our next question is from Sanjay Sakhrani of KBW. Your line is open.
Thank you. I was hoping you could discuss this merchant litigation that's being threatened in Europe that you guys disclosed in the 10-Q. It seems like you feel like you should be indemnified there as well. I was wondering if you could just flesh that out a little bit. I guess, would that be part of the reason that would drive the banks to exercise the put? Then second, I just wanted to make sure I understood Byron's point about the Chase deal. Would the gross revenue yields then come down
Next quarter, given the structuring of the deal? Because if you look at kind of year-over-year change, those were up in the second quarter. Thanks.
You want to answer the second one first, Byron?
Yeah. Let me do the second one first. Everything else being equal, yes, the gross revenue yields would come down isolated to that one factor in Chase, because you still have the transactions, but the way that they are being charged, gross equals net, no incentives. Incentives would go down, gross yield would go down.
On the first point, let me take a shot at that for a second. The EC is investigating several different things, one of which is intra-European credit interchange. This is where there is a card issued within Europe, and it's used inside of Europe. That affects Visa Europe. It does not affect us, per se. They're also investigating inter interchange, which is when it is a card issued outside of Europe and it's used inside of Europe. We obviously don't know, since we're in discussions with them, where it winds up. We have nothing to report on exactly the specifics of what they're thinking. Relative to how it impacts their view of the put, I think, honestly, that's a question for them, whether it's for Visa Europe or for the banks themselves.
In the different scenarios that I spoke about, to the extent that we have to go through a valuation process to understand what the sustainable earnings of Visa Europe would be, whatever the conclusion of this inquiry would be would obviously help us, point us towards what the effect of this could certainly be. If it's something outside of the put, we would obviously have to take it into account as well. When it's concluded, we'll know the specifics, and we'll be in a position to understand the impacts.
Our next question will come from Jason Kupferberg of Jefferies. Your line is open.
Thanks, guys. Just a clarification and a question. The clarification just in terms of other future deals like the Chase deal. Are you guys kind of waiting for inbound interest in terms of other issuers approaching you, or are you actually proactively marketing this to other big issuers? Just as my question, also on the topic of the 10-Q, saw some language in there around CFPB taking a look at currency conversion fees on cross-border transactions. Just any comments you may have on that. Thanks.
Okay. On the first question, we're not the type of organization that waits for our clients to call us. I mean, in all seriousness, we talk with our clients literally day in and day out. When this was announced, there's certainly extensive conversations that have gone on and continue to go on with clients of all sizes. Even before the announcement, the conversations that we've had were very consistent with the messaging that I laid out on the last call, which is that we want to be more flexible, we want to evolve our rules, and we want to focus much more on working with merchants. We are actively involved in talking to institutions of all sizes. I would describe them as very, very different types of conversations, with people having different capabilities and different desires.
When I went through my introductory remarks, I kind of laid out what some of the principles are for us to follow. If we can do things with them that would help them grow their business and help us grow payment volume, that's something we're very excited to do.
Yes, let me take the question on the CFPB. As you might imagine, we have quite a bit of experience globally working with regulators, and it's not uncommon for them to reach out in a very informational way to try and understand how certain practices unfold within our ecosystem. That is very much the nature of this dialogue with the CFPB. They have reached out and asked us if we would help educate them on how the currency trading ecosystem works as it relates to credit and debit cards. Myself, along with a number of my colleagues have met with them personally. It was a very straightforward educational type discussion focused on the mechanics of how currency conversion works. I would describe the working relationship as very cordial, very sound.
I would say at the same time that our engagement is ongoing, and we will, of course, keep you all informed as this dialogue unfolds.
Our next question will come from James Friedman of Susquehanna. Your line is open.
Hi. Thank you for taking my question. Charlie, since the spring is the season for this, I was wondering how you would characterize the general tone for new fees at this point. Should we expect more or less revenue growth coming from new fees this year than in prior years?
I didn't realize that spring was the period of time for new fees. I think I'll leave it at the revenue guidance overall that Byron gave. I think for us to talk about in another level of detail of what we're forecasting for revenues would go beyond what is our practice, and not something that we would want to get into.
I would just add to that, when we gave the original guidance that Charlie referred to at the beginning of the fiscal year, we said that we would deliver our revenue the old-fashioned way, through volume increases, and that there would not be a material reliance on any sort of price-
Pricing overall.
Yeah, pricing overall within the business plan for the year.
Our next question will come from Rod Bourgeois of Bernstein. Your line is open.
Hey, great. Hey, a two-part question on the Chase VisaNet deal. Can you just give us a sense of the reaction you're getting from other banks in the wake of that deal, and also maybe the acquirer community, how they're reacting? If you see any major constraints on the ability of other, particularly large banks, to pursue a similar deal, Chase VisaNet type deal. Byron, maybe on the numbers, can you give us a sense on whether you expect to be revenue positive on the Chase deal over the next year? Clearly, there's some discounting that's going on that contract. Will the volume gains from MasterCard at Chase offset the impact of the pricing discounts? Thanks.
Why don't we start with the numbers? The first part of the question was do we expect to be volume accretive with the signing of this contract going into.
Revenue.
Excuse me, revenue accretive going into the next year. The question is absolutely yes. That when we factor in all the elements of the deal, including those you referenced, we expect to have positive revenue growth with the Chase relationship in the coming year.
Relative to the reaction from banks and acquirers to Chase, I would say it was mixed initially, and quite candidly, was probably confusing because there were not a lot of facts because there were terms disclosed at the point of a letter of intent, not a final contract, which is what we have signed now. We've been able to have much more in-depth conversations about what it is, similar to what we've talked about here. I think the conversations very much have moved to what is it? It's confusing. What does it mean? This is both on the bank side and the acquirer side to what can Visa do to help them customize and differentiate their experience. We're having that discussion, again, from small institutions to much bigger institutions, and acquirers alike.
As I said, I think the overriding concept here is the world is changing around us. There are lots of people that we compete with and people who want to compete with us that have strategies around working with merchants at point of sale. If we don't figure out how to evolve our model to encourage issuers and acquirers to do that, then we'd be leaving great opportunity on the table. We do have to be flexible in how we do it, as long as we don't think that it violates any of the principles that I spoke about before. We feel very good that what we're doing actually does that.
Our next question will come from Tien-Tsin Huang of JP Morgan. Your line is open.
Thanks. Good results. I'll ask two modeling nerd questions. Data processing fee, that yield or revenue per tran, that jumped up quite a bit, the biggest we've seen in a long time. What's driving that? I guess going forward, that will be impacted to some degree by the Chase deal. Secondly, the international transaction fee line looked like the revenue growth grew at a premium to cross-border volume for the first time in over two quarters. What's driving that as well? Thanks.
Let me respond. On the data processing yield, as you all remember, about one year ago, as part of our Dodd-Frank debit mitigating strategy, we restructured our pricing. We introduced a lower variable transaction fee. We introduced, for the first time, a fixed acquirer network fee. When we first introduced those in the way that we bill and record revenue, we had to do that to a certain degree with some estimates, and since it was a new pricing structure. As we conclude the March quarter, we've pretty much got one year of this under our belt. We're now in a position where we can start to true up some of those estimates. What you saw in the data processing yield line was some true up there and a few credits.
Going forward, I would say that the data processing yield is more likely to approximate what you saw in Q1 as opposed to Q2, still very solid, but from a nerdy modeling standpoint, I think that's probably the guidance you were looking for. With regards to international, as we have talked about this particular line on several occasions before, there is always some degree of variability between volume and unreported revenue. Part of it is revenue mix. Part of it is the amount of volatility we see in the currency markets. In periods where there is a higher degree of volatility, often associated with saber-rattling or conflicting claims on islands in the China Sea, issues around Cyprus, anything that roils the currency markets and creates more volatility has an impact on the revenue that we report. That was the case with international this past quarter.
We had a step up in currency volatility relative to what we'd seen historically, we also had a little bit of a tailwind with regards to the specific currencies and their weighting during the quarter. Some currencies just naturally yield more of a return across our fee base than others. That's the reason.
Our next question will come from Bob Napoli of William Blair. Your line is open.
Thank you. Just two quick ones. What would be the strategy on funding the put if it were to be executed? Secondly, I'd like a little update on CyberSource. It's been growing 25% for the last couple of years, doesn't seem to be slowing. I just wondered if the revenue is growing in line with that, and what the operating profit margin is on that CyberSource business. Any update on strategy would be helpful.
Let me take that. In the event that we needed to consider funding for Visa Europe, let me just give you the following perspective. We currently, at the end of this quarter, we have roughly $2.2 billion of cash that is in offshore accounts, not immediately required for working capital. That $2.2 would be available for use in a Visa Europe put situation. Once the put, if and when the put is exercised, we have 285 days to negotiate out and fund the transaction. During that period, we would generate, in the normal course of business, at least $3 billion of free cash flow. Before we ever get to debt, if any were to be required, recognizing we have no debt, we've got $5 billion of cash readily available to deploy.
That's not to say that we would use all that cash because this might, again, if the put were to be exercised, this might be a good opportunity to actually put some debt on the balance sheet and lower our weighted average cost of capital. The second question was CyberSource. CyberSource was acquired, as you might remember because it moved us closer to the merchant checkout page with regards to internet transactions. The fastest-growing channel we have today is e-com. CyberSource gives us an additional value add in the transaction and a way of directly connecting through the acquirer to our network in a way that is very synergistic with the rest of our business. When we acquired CyberSource, it was primarily a U.S. business. The opportunity for us was outside the United States.
We have invested aggressively in CyberSource to accelerate the expansion of that business outside the U.S., and as a result, have been successful in sustaining its transaction growth rate at 20-plus% ever since we acquired the business. I can tell you that that transaction growth rate is slightly above the pro forma projections that we presented to our board when we justified the purchase price. We couldn't be more pleased with the role CyberSource is now playing in the Visa Inc. global strategy as we zero in on capitalizing on the internet growth opportunity, which is absolutely global in its scope.
I'll just add, all of our work that we've got going on with merchants, as I've talked about, CyberSource and its capabilities are a tremendous advantage for us in those conversations.
Our next question will come from Julio Quinteros of Goldman Sachs. Your line is open.
Hey, guys. Not to beat a dead horse, I guess I'll keep jumping on this Chase Merchant Services contract. Thinking through the reaction, I guess, mostly as it relates to kind of the independent or standalone merchant acquirers versus the bank-owned merchant acquirers, how exactly would you distinguish the benefits to each one of these guys, especially if they don't actually issue their own cards?
Well, again, I think the way we think about it is the importance of what we did with Chase is not specifically about the Chase structure. It's about what the intent we're trying to get at, which is to put issuers and acquirers together to work directly with merchants. To the extent that a bank owns an acquirer, it obviously allows you to have that conversation under one roof. To the extent you have issuers who don't control their own acquirers, hopefully now they're thinking about, and are in fact having conversations with acquirers about the types of things that they could do if they worked more closely together. The reality is, I think if you go around and talk to most issuers, they would probably say that there wasn't a lot of conversation that went on between the issuing and acquiring side.
Partially because of our rules that stood in the way of them working together to do something positive for the merchant. Now that we've given them the ability to do that, you don't have to own your own acquirer in order to take advantage of the changes that we've made. I think, quite frankly, we'll see how it evolves. I think, going back to Rod's question earlier, there are some people that look at this and say, "Okay, got it, understand it, but I don't believe it. I think it's too hard. I don't think it's going to be successful. I don't intend to change anything." We'll wait and see, and if we get to a point of, hey, there's something there, then we've got capabilities and we'll go forward with that.
There are others that are more interested in thinking through how to take advantage of some of the things that we're willing to do. I think, honestly, this will evolve over the next, I'm going to say, couple of years. It's not the type of thing that it won't be very short. They involve not just conversations between issuers and acquirers, but you have to have conversations with merchants. They have to believe that there's a real value proposition there. They've got to do some things different, potentially in their stores with their customers. That's not always the most obvious and easy conversation. Again, we think it's the right conversation to have, but it's a thesis that has to be proved.
Our next question is from Darrin Peller of Barclays. Your line is open.
Thanks. Listen, just first to clarify on the Chase deal timing again, then a quick question on the staged wallet fee. First on Chase, did the deal economics actually show up at all in the quarter that was just reported in terms of the incentives and because you came in at 16% as a percentage of gross revenue, so it seems a little lower than the 18% plus. Just a question on the staged wallet fee that MasterCard has announced. It seems like Visa's still not committed to doing that, as far as at least we've seen. Can you just give us some idea and thought around that fee and really your interaction with, for instance, PayPal and some of the e-commerce players that could affect?
Yep. I thought you were going to do the first one.
Okay, let me take the first one. Just to clarify the question, because the Chase deal was signed in April, actually, it did not have any impact to the quarter just reported. It has a retroactive effect a little bit earlier, but that is all contemplated in the guidance that we gave for the balance of the year.
On the staged wallet question, first of all, just on the actual staged wallet fee that MasterCard implemented, that's not something that we're currently contemplating. We're actively thinking through what has changed in the ecosystem and how we have to react to that. Our relationship with PayPal and people like them has evolved. It's complicated. They specifically are a very important customer of ours, but they have their own ambitions. We're mindful, I think first and foremost, of the impact that they have, both positively and negatively, potentially on our issuers, because that ultimately will be what determines our success. I think we are actively thinking about the right way to restructure the ecosystem in a way that works for everyone. We've got nothing to announce now, but we will at some point.
Our next question will come from David Togut of Evercore Partners. Your line is open.
Thank you. What is Visa's strategy to gain market share in the corporate card market versus MasterCard?
Lauren, do you want to talk about what the changes?
Yeah.
Maybe over the past year?
Yeah. In the commercial side, a lot of success in this marketplace is dependent on the sophistication of the platforms that you bring to bear to service corporate clients. It's a very information reporting intensive business. We have made significant investments over the last several years in a platform we refer to as IntelliLink. We believe what we have today is a state-of-the-art and one that has been, compared to where we were 5 years ago, has been a game changer for us in terms of being much more successful in capturing commercial business, it's largely driven by the investments in the sophistication of reporting multi-currency, multi-country, that's really the lead card we play.
Our next question will come from Glenn Fodor of Autonomous Research. Your line is open.
Hi, good evening. Thanks for taking my question. Just turning to U.S. credit. Clearly, you've had a great run recently, even posting above-market growth. What's important for us is to get a sense of how much longer this can continue. In that vein, is it possible just roughly to parse your growth into maybe 3 buckets, sources of 3 buckets? Like, just having faster-growing clients because of client-specific reasons, clients that are growing Visa volume faster because of the things you're doing with them, then finally, just share gains overall. Can you roughly bucket that for us then maybe sum it up with some texture of how much pent-up above-market growth do you have in the backlog and the pipeline here to give us confidence that this can continue for several more quarters or even beyond that?
I guess I'll just start, Byron, you can chime in. Obviously, it's very hard to put things into the buckets numerically the way you spoke about. I think when you look at our issuing base, we've certainly benefited from the partnerships that we have with the faster-growing issuers out there. Honestly, you can say that that's luck on our part historically, or it's that Visa targeted the right population of customers. I think it stands for itself. Things don't happen by chance, we do have a very fast-growing set of customers that we certainly benefit from. The same thing is true relative to the co-brands that we have. The co-brands, just like anything else, not all co-brands are equal.
We think we've got the premier client base out there, and we've been clearly very big beneficiaries of that and would expect that to continue.
I would just add one other component to this. In addition to the quality and the growth delivered by the issuer, that's also impacted by the quality of the cardholder portfolio as measured by affluent income levels. We are very well-positioned in the affluent portfolios. If you think about it, what has driven the credit card payment volume growth, certainly over the past two years, has been predominantly affluent. Being well-positioned as the economy recovers, this is an area where we are well-positioned to sustain this kind of growth. It should be less volatile in that sense. We certainly feel it has strong legs relative to the delta. That's a much harder one to frame.
Our next question will come from Bryan Keane of Deutsche Bank. Your line is open.
Hi, guys. Just a couple of questions. I guess first on the EC inquiry, does that have any potential impact on Visa's fees, or are we talking about Visa Europe fees? On the Chase Visa deal, I guess two questions. One, are we talking about a material amount of volume that you guys expect to consumer credit and debit? I'm just trying to get a sense if that's new cards just for new business, or will that be some of the existing business? Finally, I've heard you say, Charlie, before that Chase could have done this on-us transactions before. The question comes out, then why are they using Visa at all? Is Visa getting any money at all for allowing on-us transactions? Thanks so much.
Let's start there. What we said they could do historically was enter into pricing arrangements directly with merchants relative to interchange. Again, anyone can do that today, and that's not specific to on-us transactions. I'm not sure then the rest of the question flows, so if we didn't answer it, maybe come back and ask us the question again. They and everyone else have the ability to go negotiate interchange, and they've got the ability to do that in this agreement in a different format and a different structure. On the size of the Chase commitment, again, I think the best way to characterize that is what Byron said, which is net, all in all, we think that we're still in a position to grow revenues.
How we get there and whatnot is not something that I think is appropriate for us to talk about. Back on the first piece on the EC inquiry, it is on interchange. That would be the direct impact of what it is they're looking at today.
At this point, we have time for one more question, operator.
Our next question will come from Moshe Katri of Cowen and Company. Your line is open.
Moshe? Moshe, are you there?
He disconnected. We can go on to the next question if you wish.
Okay. Someone hit the lottery.
John Williams of UBS, your line is open.
Hey, you snuck me in. Thank you, guys. Thanks for taking my question.
Thank Moshe.
Thank Moshe.
I will. I had a follow-up. I hate to beat the dead horse on Chase Merchant Services, and forgive the basic nature of my question. I think it's reasonable to say JPMorgan's not paying you guys very much in the way of assessment fees. As you consider doing this deal, what was lacking in the relationship that made something of this magnitude necessary? Obviously, you're locking up a large customer for a while, but how does Visa actually benefit in an incremental way? It sounds like on the one hand you might get more transactions, but on the other hand, the on-us transactions will stay on us. If you could give a little more color on how you guys specifically benefit in an incremental way, that'd be helpful. Thank you.
I'll give you our point of view, but again, some of those questions I think are important for them. Specifically from our point of view, we don't believe that this structure was necessary to accomplish what the end goal is. The structure is something that we worked on together because it's something that was important to them. We believe that this structure isn't specific to them, that we could go accomplish the same thing by working with issuers and acquirers separately without this kind of structural transaction that occurred.
The benefit in this, if we're successful at this, is really related to the rule change that we made, which encourages and allows the issuers and acquirers to go talk to merchants directly and to ask the question, "What can we do for you?" Or to propose an idea of, "We can do the following thing for you to help you drive more sales, drive more volume into your stores." In return for that, presumably there will be additional transactions that get directed to the Visa cards. Again, this structure, we don't believe is necessary to do that. It certainly allows that to happen, and that's what was important to us.
I would just add on the economics, John, that this business has always been built on an economic business model that says the larger the client, the larger the portfolio, the better pricing you get. This was one of our largest clients, one of the largest portfolios. We had the opportunity to enter into a 10-year arrangement that has a set of economics that are consistent with how we have been doing multi-year contracts with other clients over the years, including Chase. Given the size of this portfolio, and where we expect it to be over the next five and 10 years, is there margin compression? Yes.
That margin compression is consistent in the same zip code as what we would normally have expected to have put on the table, given the size of the portfolio and the kind of growth that we're expecting this partnership to produce. From that standpoint, we're very comfortable with the economics of this deal.
With that, we want to thank you all for joining us once again. Just to reiterate what Charlie said earlier, we are hosting an investor day on June 6th here in San Francisco. Formal invites have been sent out. Many people have responded. If you haven't and intend to do so, please do. If you are inadvertently left off that list, let Vic or I know, and we'll make sure you get the formal invite. Any other follow-up questions, also to me or Vic, and thanks again.
Thank you everyone.
Thank you for your participation on the conference call today. At this time, all parties may disconnect.