Visa (NYSE: V) finally gets a competitor it can’t pay to be a friend
Visa Inc. (NYSE: V)—the world’s largest global payment processor known for widely used debit and credit card networks—rose to its dominant position by using both carrots and sticks that made partners out of potential competitors. It’s now facing a foe it likely won’t be able to turn into a friend so easily: the US government.
In a 71-page lawsuit filed last month, the Department of Justice accused Visa of illegally building a monopoly over the processing of debit card transactions that allows the company to generate $7 billion a year in inflated fees. The case will likely take years to work its way through the courts, but it could remake the payment industry and have wide-ranging ramifications for firms that both work with and compete against Visa including American Express (NYSE: AXP), Discover Financial Services (NYSE: DFS), JPMorgan Chase (NYSE: JPM), Apple (NASDAQ: AAPL), PayPal (NASDAQ: PYPL), Square (NYSE: SQ) and others.
At the heart of the DOJ’s complaint is the allegation that Visa took over 60% of the market for debit card transactions by moating itself off from competition with policies that rewarded banks, merchants and fintech firms for working with it, and penalizing them when they didn’t. Visa went so far as to pay possible usurpers to keep them from innovating, the agency said in a statement, citing comments from a former Visa CFO who said that “everybody is a friend and partner. Nobody is a competitor.”
“Visa is a monopolist that is distorting the marketplace for debit transactions,” Attorney General Merrick B. Garland said in a speech, citing a series of contracts the card processor signed with Square to discourage it from competing directly with its Cash App wallet and referencing comments by a Visa executive who said the fintech firm had successfully been placed on a “short leash.”
“It is unlawfully blocking competition,” Garland continued. “It is depriving American banks, merchants, and consumers of lower costs and product innovation. It is charging a hidden toll on each of trillions of transactions, adding up to billions of dollars of fees imposed annually on American consumers and businesses.”
The lawsuit details how Visa allegedly paid emerging rivals hundreds of millions of dollars to keep them from expanding into core activities that would threaten its dominance. The company saw PayPal and Apple Pay as existential threats but was able to use incentives and the threat of higher fees to keep them in their lanes and on Visa networks instead of developing their own. The lawsuit alleges that Visa used a policy it termed the “mutually assured destruction principle” to keep Apple from becoming a direct competitor.
While the DOJ’s monopoly accusations are currently limited to debit cards, Visa has reportedly used similar tactics to advance its credit card business and paid retail giant Costco Wholesale (NASDAQ: COST) $150 million to keep it from launching a card that could use a rival network operated by JPMorgan Chase. Visa has said it is pro-competition and promised to defend itself, arguing that the DOJ’s lawsuit is without merit.
The DOJ has a mixed track record when it comes to winning antitrust cases, but its latest move against Visa mirrors other recent suits it’s brought against platform-operating middlemen—like Live Nation (NYSE: LYV) and Apple—that are able to profit from lucrative transaction fees consumers have little choice but to pay. It’s reasonable to assume that Visa will mount a formidable defense, as the high-margin debit card business accounts for a large part of its revenue and profit. Attorney General Garland stated that much of Visa’s revenue from debit card transaction fees results from illegal conduct.
“Without intervention, Visa will continue to insulate itself from competition and subvert the competitive process in this essential industry that fuels US commerce, all the while enriching itself at the expense of the American people,” the DOJ said in the lawsuit. “Competition, not Visa, should control whether and how issuers, acquirers, merchants, and consumers interact with each other.”
Visa shares have mostly recovered from the 6.5% decline they saw immediately after the DOJ announced its lawsuit, although the company has fallen behind peers such as its archrival Mastercard (NYSE: MA) that has gained 22% so far this year. And while any move to dismantle Visa’s strict dominance of debit card networks could theoretically benefit competitors, the Federal Reserve is also moving to shake up the sector with the launch of its FedNow Service for low-cost, round-the-clock instant payments that all banks and credit unions will be able to offer to their customers. The system is still in its infancy, but it has the potential to make debit card networks obsolete.
With the DOJ’s latest antitrust lawsuit and the Federal Reserve’s move into retail banking payments, the US government is sending a very clear signal about what could be in store for the entrenched transaction fees much of the industry has been known to covet. Any company dependent on them—fintech or incumbent network operator—may want to read the writing on the wall: Uncle Sam is coming for them.
