Visa sued over debit card market

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The U.S. Department of Justice has sued Visa Inc., accusing the global payments giant of illegally monopolizing the debit card market, in the Biden administration’s first major antitrust case in the financial services industry.

In a complaint filed Tuesday in Manhattan federal court, law enforcement said Visa handles more than 60% of the $4 trillion in annual U.S. debit transactions and struck a series of deals that punished merchants who tried to use alternatives and paid potential rivals to keep them out of the market.

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“Visa’s illegal conduct affects not just the price of one thing, but the price of everything,” Attorney General Merrick Garland told reporters in Washington as he announced the lawsuit. “Visa charges a hidden fee on every one of those trillions of transactions.”

Visa is the largest payment network in the U.S. and collects about $7 billion a year in fees for both debit transactions and so-called “card-not-present” transactions, where customers use their debit card number online or in apps, according to the complaint.

In its agreements with merchants, the Justice Department said, Visa imposed an anticompetitive pricing structure that essentially forced them to route all their debit transactions through its network or face stiff penalties. Visa also struck deals with technology companies, including PayPal Holdings Inc., Apple Inc. and Block Inc., that were developing products that could challenge its monopoly on payment networks, paying them hundreds of millions of dollars to stay out of the market, the agency said.

Visa shares fell 5.4 percent to $273.09 at 3:55 p.m. on the New York Stock Exchange.

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“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 an emailed 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.”

The case opens a new front in the Biden administration’s antitrust crackdown after efforts focused on big tech companies, airlines and retail, among other industries, with mixed results.

Aside from Visa, the most popular debit card networks in the U.S. are Mastercard Inc. and Discover Financial Services, although others include NYCE owned by Fidelity National Information Services Inc., STAR owned by Fiserv Inc. and Accel.

Dodd-Frank Act

The Justice Department complaint alleges that Visa’s illegal activities began in 2012 as a response to the Dodd-Frank Act, which Congress passed in the wake of the financial crisis. The act required card issuers — which are often banks — to offer at least two independent debit networks to increase competition and give merchants more choices. It also set limits on the fees that banks require retailers to accept debit cards, although the act did not limit the fees that debit networks themselves charge to process transactions.

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Concerned that the law would create competition and hurt its dominant position in the debit market, Visa began requiring merchants to sign contracts with onerous terms. The Justice Department accused the company of practicing “zero pricing,” charging merchants significant fees for transactions unless they forwarded the vast majority of them to Visa, at which point they received a discount. The fee structure forced merchants to send most of their transactions to the payments giant, effectively excluding smaller debit networks, the complaint alleges.

Visa has also sought to blunt the development of new technologies that could allow consumers to bypass its network when shopping online. The most public fight was with PayPal, which initially encouraged users to link their bank accounts to pay for items online. In a 2016 agreement, PayPal promised to no longer encourage Visa cardholders to link their bank accounts to their wallets and promised to offer the use of debit cards “as a clear and equal payment option during sign-up and subsequent checkouts.” In return, Visa said it would reduce some of the fees charged by PayPal.

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The agreement with PayPal, renewed in 2022 for 10 years, requires the company to route 100 percent of its debit transactions through Visa’s network, the complaint says.

“Existential threat”

Visa has reached similar agreements for Apple Pay, the digital wallet it introduced on iPhones in 2014 that lets you use debit and credit cards for mobile payments. It has a similar agreement with Block, the fintech company formerly known as Square, which also runs the Cash App consumer payments platform.

Visa viewed Apple Pay as an “existential threat” and entered into a deal in 2012 that prohibited the company from developing technology that could compete with Visa’s debit capabilities, according to the Justice Department. In return, the complaint alleges, Visa pays Apple hundreds of millions of dollars a year.

The payments company was concerned that when Block introduced its Cash App product, consumers might start using it instead of debit cards, so the companies struck a deal in 2014 with a commitment to direct debit, the U.S. alleges. When Block introduced a new feature in Cash App in 2016 that allowed consumers to store money in their account, Visa threatened to terminate the deal, and the company removed the feature, the complaint said. Last year, the companies signed a new deal under which Block would send 97 percent of its transactions through Visa.

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A long-term investigation

The Justice Department’s lawsuit is the culmination of a multi-year investigation into Visa’s business practices, stemming from its failed 2021 acquisition of financial technology infrastructure company Plaid Inc. It is also the latest case in which law enforcement has accused a dominant company of using anti-competitive agreements to stifle innovation.

Representatives for Block and Apple did not immediately respond to requests for comment. Plaid and PayPal declined to comment.

Last month, a federal judge in Washington ruled that Alphabet Inc.’s Google violated antitrust law by paying $26 billion to companies to make its search engine the default option on smartphones and web browsers. The Justice Department argued that those exclusive deals prevented competing search offerings from acquiring the users and data they needed to grow. Similarly, the Justice Department in May sued Live Nation Entertainment Inc., alleging that its Ticketmaster ticketing unit used long-term exclusivity agreements to force venues to use its technology.

The case is US v. Visa, 24-cv-07214, U.S. District Court, Southern District of New York (Manhattan).

pl.bloomberg.com

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