NEW YORK (AP) — MasterCard Inc. on Thursday said it recorded a $495 million charge in its fourth quarter to cover potential losses related to an ongoing lawsuit brought by merchants over the fees they pay on credit card transactions.
Without the charge, MasterCard's earnings topped expectations as shoppers put more purchases on debit and credit cards during the holiday season. Shares rose more than 2 percent in premarket trading.
The Purchase, N.Y.-based payments processor said the charge represents the after-tax portion of a potential settlement in the case. On a pre-tax basis, the charge was $770 million.
Wall Street had speculated the pre-tax bill would run about $1.2 billion to $1.8 billion if MasterCard and rival Visa Inc. settle the suit.
The class action suit stretches back years and also involves most of the major U.S. banks. It is set to go to trial in September before the U.S. District Court for the Eastern District of New York, but many analysts and investors expect a settlement well before that.
The charge cut deeply into MasterCard's fourth-quarter profit. The company posted net income of $19 million, or 15 cents per share, compared with $415 million, or $3.17 per share, in the 2010 fourth quarter.
Excluding the charge, MasterCard said it earned $514 million, or $4.03 per share. That topped analysts' average expectation of $3.92 per share. In premarket trading, MasterCard shares rose $9.38, or 2.6 percent, to $367.
Revenue rose 20 percent to $1.73 billion, from $1.44 billion in the prior year. That matched Wall Street's forecast.
MasterCard said use of debit cards in the U.S. rose faster than the use of credit cards during the holiday shopping season. That's happening even as banks cut debit card rewards programs and ramp up incentives to use credit cards in response to a law that kicked in Oct. 1. The law cut the fees merchants can be charged for debit card transactions — fees similar to those being fought over in the lawsuit.
Debit card use rose more than 18 percent during the quarter, with card holders making $139 billion in purchases. Credit card growth picked up as well, rising nearly 7 percent to $143 billion. It's a sign that consumer are still loath to pile up debt.
Debit card use also rose sharply in the rest of the world, which accounts for more than half of MasterCard's revenue. Outside the U.S., $176 billion was purchased using the cards linked to bank accounts, a 23 percent jump. Credit card use gained 156 percent to $405 billion.
For the year, MasterCard reported profit of $1.91 billion, or $14.90 per share, up 3 percent from $1.85 billion, or $14.10 per share, for all of 2010. Revenue leaped 21 percent to $6.71 billion, from $5.54 billion the prior year.