The Government’s Lawsuit Gets Into the Weeds on How Visa Built And Maintains Its Debit Empire

The U.S. Department of Justice’s 71-page complaint accusing Visa Inc. of monopolizing U.S. debit networks goes into great detail about the company’s pricing strategies and attempts to get merchants and card issuers to direct their debit business toward Visa.

Those efforts have been quite successful. Referring to Visa’s so-called “moat” around its debit business, the complaint says, “today, over 60% of all U.S. debit transactions run via Visa’s payments network. And Visa’s share of card-not-present debit transactions exceeds 65%. Mastercard is a distant second, processing less than 25% of all U.S. debit transactions and card-not-present U.S. debit transactions. Other networks, known as ‘PIN networks’ because they originally facilitated ATM transactions for which accountholders needed to enter a PIN, are significantly smaller.”

The lawsuit, filed Tuesday in U.S. District Court in Manhattan, alleges Visa has market power in the U.S. market for general-purpose card-not-present debit-network services and for the market for general-purpose debit network services. It asks the court to decree that Visa has monopolized, or attempted to monopolize, both markets in violation of the Sherman Act. The government wants the court to prohibit a number of the pricing, fee, and incentive tactics Visa uses to generate debit transactions from merchants and build loyalty from debit card issuers.

One such tactic frequently mentioned in the suit is what the DoJ calls “cliff pricing,” also known as “all unit” pricing, which offers lower transaction pricing to a merchant or merchant acquirer as long debit volumes meet a certain threshold. If the merchant or acquirer fails to route enough debit transactions to hit the mark, however, Visa can impose its higher “rack rates” on all transactions, according to the suit.

Most debit cards today feature the Visa or Mastercard logo on the front, but also are enabled to route transactions to PIN-debit networks even though those networks’ brands are on the back of the card. But factors that influence which transactions are routed to which network are complex and depend in part on merchants’ volume commitments with networks and which networks a debit card supports. Visa has manipulated many of those factors to its advantage and to the disadvantage of the PIN-debit networks, even if their per-transaction pricing is lower, according to the lawsuit.

“As a result of Visa’s cliff pricing, for a PIN network to win a meaningful set of transactions away from Visa, it must do two things,” the lawsuit says. “First, the PIN network must offer a better per-transaction price than Visa. Second, and more significantly, the PIN network must also compensate the merchant for the penalty Visa will impose on all the transactions the merchant still has to route to Visa, which is larger than the set of transactions for which the PIN network can compete. To compensate some merchants for the loss of Visa incentives on Visa-eligible debit transactions, the PIN network may have to offer zero or negative per-transaction prices. These penalties reflect significant and cost-prohibitive barriers to expansion for the PIN networks.”

In an attempt to thwart network and issuer strategies that allegedly resulted in high debit card acceptance costs for merchants, the Durbin Amendment, a part of the 2010 Dodd-Frank Act, required issuers to enable routing to at least one debit network not affiliated with either Visa or Mastercard. The Federal Reserve is charged with setting regulations to enforce the amendment.

But Visa has taken steps to limit the amendment’s threat to its debit volumes, according to the suit. Visa now has nearly 1,000 issuing contracts that contain significant volume incentives, “which strongly deter the issuer putting more debit networks on the back of the card,” the suit says.

It later says that “in response to this new regulatory landscape, Visa has engaged in a relentless strategy of locking up the entities that control routing decisions and has now entered de facto exclusive routing contracts with over 180 of its largest merchants and acquirers. Visa’s merchant and acquirer contracts cover over 75% of Visa’s debit volume,” the result of which is that at least 45% of total U.S. debit volume is off-limits to competitors, according to the suit.

Meanwhile, Visa warily viewed newer entrants into the debit payments market, including PayPal, Apple Inc. with its digital Apple Pay mobile-payment service, and Block Inc.’s CashApp, as potential threats, according to the suit. One Visa strategy to thwart new rivals is to buy them off, according to the DoJ.

“Visa offers lucrative incentives, sometimes worth hundreds of millions of dollars annually, to these potential competitors under the express condition that they do not develop a competing product or compete in ways that could threaten Visa’s dominance,” the suit says.