A deep dive into the DOJ’s antitrust lawsuit against Visa and its debit business

The news: A Justice Department civil antitrust lawsuit against Visa accuses the payments network of illegally maintaining a monopoly over the debit card market, per the agency’s press release.

• It claims that Visa imposes anticompetitive pricing on merchants to discourage them from routing debit transactions to competitors. It also alleges that Visa imposes contracts on issuers that unlawfully restrict the growth of its debit competition, leveraging its monopoly power to inhibit competitors’ scale.
• It further claims Visa instead encourages would-be fintech rivals like Apple and PayPal to become partners by offering incentives to stay out of the market.

Visa’s network processes more than 60% of all US debit transactions, charging more than $7 billion in fees each year, per the complaint. By comparison, Mastercard controls 25% of the debit market, with PIN competitors dividing up the rest.

What is the DOJ’s goal? It’s asking the court to prevent Visa from continuing certain alleged anticompetitive practices, including:

• Bundling credit services or incentives with debit network services or volume
• Imposing pricing incentive structures, such as cliff pricing, that discourage competition
• Referencing debit rivals implicitly or explicitly in Visa’s contracts
• Imposing fees on debit transactions routed over non-Visa networks
• Imposing contractual limitations on competing payment methods and payment rails, and on customers’ ability to offer their own payment networks or adopt new technologies that could disintermediate Visa’s network

The agency is also asking for appropriate relief to restore competitive market conditions.

The reactions: Visa General Counsel Julie Rottenberg said the lawsuit was “meritless” and that the company would defend itself in court.

• Rottenberg argued that an “ever-expanding universe of companies” is offering ways to pay, saying, “Visa is just one of many competitors in a debit space that is growing.”
• She also said business and consumers choose Visa because of its “secure and reliable network” and “world-class fraud protection.”

But retail groups applauded the decision.

• The National Retail Federation (NRF) called the lawsuit “a major step forward in fixing our nation’s broken payments market.” But it also said the lawsuit should not be the last, as Visa’s alleged anticompetitive practices in both the debit and credit card industry go further than the DOJ’s complaint.
• The Merchants Payment Coalition (MPC) said, “Visa has relentlessly flouted the law to maintain a monopoly over setting fees for transactions made with cards issued under its brand and for processing those transactions.” MPC argued these practices extend to its credit cards as well as its debit network.

Where Visa looks vulnerable: It won’t be easy for Visa to defend itself against the DOJ’s claims about its fintech partnerships.

• The complaint alleges that Visa feared that digital platforms like Apple Pay, PayPal, Square, and Cash App had “network ambitions” that could disintermediate the payments network. Visa saw Apple Pay, specifically, as an “existential threat” to its debit business.
• To mitigate this threat, Visa implemented a partnership strategy that included offering incentives of up to hundreds of million dollars annually—under the specific condition that partners wouldn’t offer a competing product or service. The company also threatened to levy additional fees if the digital players developed a competing product.

Assuming Visa doesn’t succeed in dismissing these accusations, it will need to show that it didn’t get these contracts signed by wielding its market power to keep competitors out of the market—something courts will likely view as a violation of Section 1 of the Sherman Antitrust Act.

What are the open questions around this lawsuit?

• To forecast how it could play out in court, we need a greater understanding on how the court defines a monopoly. That will depend on whether the DOJ can convince it that 1) Visa’s 60% control of the market fits this definition; and 2) it can prove Visa’s alleged activities fit that definition.
• We need more context on Visa’s pricing structure to weigh whether its cliff pricing—a common practice across many industries—could be viewed as anticompetitive.
• We also need more context around why the DOJ alleges that blame for the widespread lack of certain PIN network services, such as routing high-dollar transactions, should be laid at Visa’s doorstep.

What will happen next: Very little. Litigation often continues for years. In the longer term, a successful DOJ argument could lead to outcomes ranging from a huge fine to barring Visa from engaging in the practices the DOJ alleges are anticompetitive.

• Visa would then risk losing some of its debit market share and therefore, some volume.
• Costs for processing debit card transactions would likely drop, hurting Visa’s margins.

But Visa could face an even bigger loss in the court of public opinion.

• The DOJ is claiming that while merchants are paying Visa’s anticompetitive fees, they’re passing them along to consumers through higher prices or reduced quality.
• Attorney General Merrick Garland stated: “Visa’s unlawful conduct affects not just the price of one thing—but the price of nearly everything.”
• This has led to “billions of dollars” worth of additional fees imposed on US consumers and businesses, per the DOJ.

These arguments may anger consumers who use Visa’s products, especially those who feel shaky about their financial health and are frustrated by continuing higher prices. That may make them more open to using emerging alternatives like Pay by Bank to pay at retail.

Our take: The Durbin Amendment and its associated routing rules were put in place to ensure a fair and competitive debit card market. In this regard, it has failed. Despite the cap that Durbin placed on fees, Visa’s revenues remain strong, thanks to the company's lucrative market position. And its share of the market may be more robust than ever.