Is Visa a Debit Monopolist?

The U.S. Justice Department has sued Visa—again—this time over its debit network practices. The case is far from cut-and-dried.

The global financial ecosystem has become incredibly interconnected with the Lawsuits alleging anti-competitive practices are nothing new to Visa Inc. After all, the network, as well as MasterCard Inc., have been sued by the Department of Justice, merchants, and state attorneys general for decades over their pricing and business practices.

When the DoJ filed its lawsuit against Visa in September alleging anti-competitive practices in the debit market, the case was seen as a continuation of Justice’s ongoing scrutiny of Visa’s pricing and business practices.

Four years ago, the DoJ sued to block Visa’s proposed $5.3-billion acquisition of open-banking platform provider Plaid Inc., alleging the acquisition would stymie future competition. Visa opted to settle that suit by agreeing to drop its bid for Plaid, despite its statements that it would vigorously defend itself.

Now, in its current suit, Justice alleges Visa enjoys dominance as a debit card network through exclusive contracts with card issuers. The suit contends these agreements divert volume to Visa’s network using incentives plus punitive fees for routing volume outside the Visa network. The incentives include volume-based pricing, the suit says. Competing networks are thus denied the scale they need to compete, the DoJ charges.

The lawsuit also alleges that Visa induces potential competitors capable of developing their own debit products—companies such as Apple Inc., PayPal Holdings Inc., and Block Inc.’s Square point-of-sale technology unit—to become partners through generous monetary incentives.

“Even though the choice to make such payments reduces Visa’s immediate profits, it nonetheless pays hundreds of millions of dollars to would-be competitors to blunt the risk they develop innovative new technologies that could advance the industry, but would otherwise threaten Visa’s monopoly profits,” argues the complaint.

The suit further alleges Visa’s “conduct cuts off competition where it should occur today. Perniciously, it also prevents its current and potential rivals from gaining the scale, share, and data necessary to erode Visa’s existing dominance.”

The “dominance” the DoJ refers to here reflects the fact that more than 60% of all debit transactions in the United States run over Visa’s network, “allowing it to charge over $7 billion in fees each year for processing those transactions.”

The complaint alleges Visa earns more in revenue from its U.S. debit business than it does from its credit business, as of 2022. “Visa debit is core to its North American business, where Visa enjoys operating margins of 83%. But even these numbers understate Visa’s monopoly power over debit transactions,” the DoJ says.

As expected, Visa says it will mount a vigorous defense.

“Anyone who has bought something online or checked out at a store knows there is an ever-expanding universe of companies offering new ways to pay for goods and services,” Visa general counsel Julie Rottenberg said in a statement. “[The] lawsuit ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving.”

Rottenberg added that businesses and consumers choose Visa because it is a “secure and reliable network” that provides “world-class fraud protection” and “value.”

“This lawsuit is meritless, and we will defend ourselves vigorously,” she said.

Challenges

Antitrust lawsuits garner big headlines, but they are by no means a slam dunk for plaintiffs or defendants. The reason, legal experts say, is that such cases are complex and feature a lot of expert testimony on complicated concepts that can be difficult for a jury to follow.

“All antitrust cases involve difficult interpretations of the law, intense gathering and analysis of economic data, and a high-level battle of experts,” says Barak Richman, a professor at George Washington University Law School. The government’s suit against Visa, he acknowledges, is “a complicated case.”

Keeping in mind how difficult it can be for either side to prevail, here are some of the issues both sides will face, as well as the challenges Visa may face in the wake of the lawsuit.

One of the biggest challenges facing the Justice Department is proving that Visa built an illegal monopoly that has created a “moat” around its debit business. This obstacle keeps potential competitors at bay and protects Visa’s market share, according to the DoJ’s theory of the case.

The key question the government must answer is whether this “moat” is big enough to keep all competitors out, says Lloyd Constantine, founder, partner, and chairman emeritus at the law firm Constantine Cannon, which specializes in antitrust law.

While Constantine argues Visa has created and maintained an illegal monopoly, he notes that some of the examples the DoJ uses to make its point are questionable. Constantine has a long history of trying cases against Visa and Mastercard, first as a lawyer in the New York Attorney General’s office, then later in private practice on behalf of merchants.

“While the DoJ’s complaint about Visa operating an illegal monopoly is correct, its characterization of the marketplace is not necessarily accurate,” Constantine says.

As an example, while the government’s complaint cites several competitors harmed by Visa’s practices—such as Discover Financial Services, which owns the Pulse debit network—Constantine contends many of them have the resources to compete directly with Visa if they choose.

“If you look at what the complaint says is needed to compete in the debit market, Discover has all [the ingredients], but they haven’t chosen to do so. It’s the same with Apple, and Apple is a far more powerful company than Visa,” Constantine says.

Building a Moat

So the pressure is on the Justice Department to prove Visa’s practices keep out rivals that can erode its market share, legal experts say.

“Part of making a case for a monopoly is giving the court a description of the market [and its competitive dynamics], then proving that the controlling practices keep out all competitors and maintain Visa’s power over the market,” says James Septa, a professor of law at Northwestern University. “Visa can argue that it has good reason for its actions and that they do not harm competition.”

Another potential stumbling block for the DoJ is its allegation that Visa’s contractual practices are intended to lock out competition through monetary incentives.

“It’s common for payments networks to vie for volume via incentives and volume-based pricing, and you see similar examples in other industries,” says Leanne Lange, managing director, client strategy, in the payments advisory practice for SRM (Strategic Resources Management Inc.).

Part of what makes Visa stand out to the DoJ on the question of pricing incentives is that the company has been more aggressive than other debit networks, argues Eric Grover, principal at the payments advisory Intrepid Ventures. “Are some of Visa pricing strategies aggressive? Yes, but I’m not sure they are unfair,” he says.

While the Justice Department claims Visa has monopolized the debit market with a more than 60% share of debit volume running through its network, that claim could be challenged by Visa.

“The market share for Visa as cited by the DoJ is substantial, but it’s not an overwhelming allegation,” says Septa.

He adds that many companies are hit with antitrust suits when their market share reaches 70% or higher, but the threshold for what constitutes a monopoly varies by industry.

What’s interesting about Visa’s debit market share is that it is lower than the 70% share the DoJ cited in its complaint contesting Visa’s proposed acquisition of Plaid in 2020, says Grover.

“The market-share figures the DoJ is presenting in its current complaint suggest Visa is losing share,” Grover says. “I think there is room for Visa to increase its market share, but I don’t see them getting to more than the 70% or 80% level. Visa may be the biggest debit network, but debit competition is ferocious.”

The PIN debit networks can’t or won’t compete for volume with Visa because they have positioned themselves to be more like utilities than innovators, Grover adds.

“The PIN debit networks have neutered their brands by competing on price, not by being innovative, and in some cases by being part of a large processors’ portfolio,” Grover adds. “It can be argued that any network with scale has built a moat around its businesses.”

‘Your World Changes’

But Visa, too, will have obstacles to overcome. One challenge lies in proving that the exclusive contracts and deals it has entered into with debit issuers and other players are not anti-competitive.

While there is no law prohibiting exclusive contracts, courts have ruled such agreements can be anti-competitive because they can hinder a competitor that doesn’t offer exclusive deals but is looking to grow its business, Septa says.

Other challenges facing Visa include lack of data to support its defense that it has not stymied competition; an unexpected piece of damaging evidence surfacing during the discovery period; and a judge who interprets antitrust law differently from Visa, says George Washington’s Richman.

Outside the courtroom, Visa is likely to face challenges from debit issuers and its partners over the structure of its contracts. The partners will be looking to negotiate more favorable terms, says SRM’s Lange. “The [DoJ’s] lawsuit could give issuers [and partners] more leverage to open the hood on their contracts and see if they can renegotiate, Lange says.

Visa itself may even become more lenient in the enforcement of contractual penalties to avoid actions that could strengthen the DoJ’s case. “When the government sues you, your world changes, because the DoJ becomes a magnet for every new complaint that falls in the realm of this case,” says Constantine. “I think Visa will become more defensive about what they do and how they do it.”

The big question hanging over the case is whether it will get settled out of court. Legal experts say it could be three to five years before the case goes to trial.

“If the case settles out of court, the DoJ is going want enough of a scalp to claim it won, while Visa does not want to see its debit business dismantled or core businesses practices changed,” says Grover. “One of the risks of going to trial is that something catastrophic can happen.”