Why Visa’s Antitrust Fight Could Be So Worrying for Wall Street

By Emily Bary

Visa shares fall as Justice Department files lawsuit, analyst notes more potential alternatives for Visa debit card network if company faces penalty

Visa Inc. shares were among the worst-performing stocks in the S&P 500 on Tuesday, nearing their biggest percentage decline in nearly three years.

Investor concerns were reflected in a lawsuit filed by the Justice Department on Tuesday accusing Visa (V) of anti-competitive conduct in the debit card market.

“Visa uses a web of unlawful anticompetitive agreements to punish merchants and banks for using competing payment networks,” Attorney General Merrick Garland said in the announcement. “At the same time, it coerces would-be market participants into unlawful agreements not to compete, threatening high fees if they do not cooperate, and promising large rewards.”

In a statement, he criticized Visa’s fees. “Merchants and banks pass on these costs to consumers by raising prices or reducing quality or service,” Garland said. “As a result, Visa’s unlawful conduct affects not just the price of one thing — but the price of almost everything.”

Visa called the lawsuit “meritless” and vowed to fight it.

“Anyone who has purchased something online or made a payment in a store knows that there is an ever-expanding universe of companies offering new ways to pay for goods and services,” Visa’s general counsel Julie Rottenberg said in a statement. “Today’s lawsuit ignores the fact that Visa is just one of many competitors in the debit space that is growing and new players are finding success.”

Investor concerns began to surface Monday evening when Bloomberg News reported that the Justice Department was preparing to bring antitrust proceedings against the payments technology giant.

Visa shares were already down more than 4% ahead of the official filing and fell even further after Garland’s press conference began. The stock ended the day down 5.5%, its worst one-day decline since a 6.9% decline on Oct. 27, 2021.

It is still unclear what exactly the consequences of the government’s success will be.

In an interview before the lawsuit was formally filed, Mizuho analyst Dan Dolev told MarketWatch that the Justice Department’s interest in Visa’s upstart business is “not surprising, but it’s not good either.”

One factor that likely worries investors Tuesday is that the payments landscape is different than it was even five years ago. Back then, there were few payment options outside the card networks. But now there are more ways to make transactions, including the Federal Reserve’s FedNow offering, a real-time payments service that lets people and businesses transfer money between accounts.

“The difference between then and now is that you have alternatives to debit cards,” Dolev said. Not only does FedNow have more than 900 financial institutions on its books, but companies are working on their own ways to bypass the card networks. Walmart Inc. (WMT), for example, is planning an instant option that would let people pay directly from their bank accounts.

Bernstein analyst Harshita Rawat wrote last week that “Pay-through-bank at Walmart is not a big deal in and of itself,” but “the growing popularity of pay-through-bank solutions is a key disruptive risk” for Visa and Mastercard Inc. (MA) Walmart is working with Fiserv Inc. (FI) on a pay-through-bank option.

But Citi’s Andrew Schmidt saw the increased competition as potentially positive for Visa. The company “likely has a reasonable case for increasing the competitiveness of the debit market, given Mastercard’s debit wallet wins (e.g., Citizens), Reg II clarifications that support routing (e-commerce) through alternative networks (e.g., Fiserv’s STAR), and the increased availability of account-to-account payments,” he wrote in a note to clients Tuesday morning, ahead of the filing.

“However, there will likely be additional regulatory burdens for (Visa) and the development of the situation could extend with mixed results,” Schmidt continued.

Visa has been in the crosshairs of regulators before, with Bloomberg linking the potential Justice Department case to the agency’s earlier review of Visa’s attempted takeover of Plaid, a company that makes technology that connects people’s bank accounts to fintech platforms. The Justice Department opposed the planned merger, and Visa and Plaid ultimately called off the deal.

When Visa called off plans to merge with Plaid in 2021, the company said it was confident it would have won the lawsuit but wanted to avoid a lengthy legal battle.

But it’s unclear what would happen if the parties fought in court. The 2020 Justice Department complaint was “very damning,” Dolev said Tuesday.

See more: Visa shares fall on reports it faces Justice Department antitrust lawsuit

-Emily Bary

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09-24-24 2050ET