Roughly a week ago, the US Department of Justice (DOJ) filed an antitrust lawsuit against Visa, calling into question how they retained and gained its debit card market share in the post-Durbin era. The DOJ has alleged that Visa created a “web of unlawful anti-competitive agreements to penalize” financial institutions, merchants and processors for using competing payment networks. In addition, the DOJ suspects the card network used its monopoly power to squash innovative and potentially lower cost debit alternatives by companies such as Apple, PayPal, and Block. But what could this lawsuit mean for the payments industry moving forward?
The DOJ claims that Visa holds monopoly power in the general-purpose debit card and card-not-present debit network services markets in the United States and has consistently committed anticompetitive acts to increase, maintain, or protect its monopoly. The lawsuit alleges that Visa has enacted agreements with potential and current competitors not to compete. The DOJ also claims Visa’s agreements with merchants, issuers, and acquirers use penalties, pricing terms, volume commitments, and other terms that restrain competition, which has resulted in Visa locking in a substantial share of the debit market, making it difficult for existing or potential rivals to challenge Visa’s share. The DOJ claims “there is a dangerous probability that, unless restrained, Visa will succeed in monopolizing each market in the United States,” resulting in higher consumer goods and services prices.
The DOJ wants Visa to refrain from the following practices:
A Decade in the Making?
Regulators have been closely observing the US debit ecosystem since the Durbin Amendment was introduced in 2010 and the resulting Regulation II (Reg II) was implemented in 2011, which capped debit interchange, required the availability of two unaffiliated networks for each debit card transaction, and enforced new transaction routing rules. When Senator Richard Durbin introduced the amendment, he argued that debit interchange fees were excessive and imposed a hidden tax on consumers in the form of higher prices.
Reg II’s transaction routing requirement was expected to improve debit network competition and result in secondary or single message networks gaining a larger share versus global or dual message networks. However, volume data from both before and after Reg II suggest that the opposite is true as single message network market share decreased from just over 39% in 2011 to 29% in 2021.
Beyond the decline in single message network share of volume, other emerging payment types such as faster payments solutions, have failed to gain substantial volume. Neither The Clearing House Association’s RTP rails nor the government’s FedNow instant payments capability have gained traction for use at the consumer point of purchase. According to ACI Worldwide, only 1.5% of US payment volume was real time.
Potential Countervailing Arguments
After more than a decade of regulatory drama and tracking data, a few countervailing arguments to the DOJ’s lawsuit come to mind. Regulation II provided merchants with what some estimated to be $7 billion in relief by directly shifting revenue from Durbin-covered debit card issuers to merchants and acquirers. In addition, the regulation afforded merchants explicit choice and control to route purchases across two unaffiliated networks – a dual message network or a single message network. The Regulations did not, however, prevent a network from incenting an acquirer or merchant from routing volume to them, which may have presented a loophole in the DOJ’s case.
As SRM has written extensively, there is sufficient evidence that the government mandated allocation of revenue from issuers to merchants offered no benefit to consumers. For example, the Federal Reserve Bank of Richmond published a study that found consumers did not benefit from lower retail prices after Reg II, and researchers at the University of Chicago concluded consumers ended up in a worse position than before the Reg II changes. Furthermore, a study by George Mason University found that, as a result of Reg II, about one million people, mainly low-income families, lost access to the banking system. If the Durbin amendment did not lower consumer prices, it would be difficult to presume that this litigation would be more successful.
The counter arguments aren’t all Reg II related, though. The DOJ’s brief is narrowly focused on Visa network debit volume, but debit cards are far from the only payment option available to consumers. According to the Federal Reserve’s Diary of a Consumer Payment Choice, debit card volume represents about 30% of consumer payment volume in the United States, while other types make up the remaining 70%, suggesting a competitive payments marketplace already exists.
What to Prepare for Going Forward
If the DOJ succeeds in its case against Visa, issuers, acquirers, merchants, networks, and fintech players should expect new dynamics in the U.S. payments ecosystem and anticipate a more uncertain marketplace. All parties in the U.S. payments ecosystem will want to anticipate potential shifts as entities consider the commercial frameworks driving their business models.
As a result of this litigation, Regulators may make additional amendments to Reg II. They may create new processing requirements for transactions, removing a network’s ability to add routing restrictions and implement growth incentives in debit card agreements. Adjustments to incentives and pricing structures could mean competing payments like ACH, RTP and FedNow gain foothold in the pay-by-bank space. This could leave networks with interchange rates as the main negotiating point for routing, leading debit interchange into a race to the bottom. Both reduced volume over traditional debit card networks and lower interchange could have a significant impact to future checking profitability, leading banks to create or increase fees to recoup revenue.
If the case continues, Visa could have limited ability to gain or retain debit volume through pricing structures, incentives and contract terms. And, if the court issues relief by nullifying existing Visa agreements, it could leave the network spending much of its energy identifying alternative options to secure its business.
Other dual-message networks may experience effects from new restrictions placed on Visa, especially when stakeholder contracts enter the renewal process or if substantive changes to Reg II are implemented. This may further weaken Visa’s dual-message debit volume in the US but could result in a massive lift for Mastercard and other competitors.
Single-message networks could potentially gain market share in the absence of Visa or other network related merchant incentives. These competing networks might also receive additional flexibility to reduce debit interchange rates as existing issuer and merchant contracts expire.
Larger merchants may expect the opportunity to negotiate new pricing and routing terms with networks and acquirers. This, in turn, could continue to shift transactions towards competing debit networks; it could also have the unintended consequence of increasing merchant fees. As a result, if Visa cannot pay routing incentives, large merchants such as Amazon and Walmart could receive less beneficial pricing, boosting interest in alternative fintech-offered payments at the point of purchase.
Acquirers would likely lose Visa and other network incentives, reducing their profitability. Fintechs and emerging payment schemes like PayPal and Block would likely steer more consumers towards lower-cost payment methods such as ACH, RTP, and FedNow. Fintechs and emerging payment schemes like PayPal and Block would likely steer more consumers towards lower cost payment methods such as ACH, RTP and FedNow.
With all that’s at stake, there’s a chance Visa may attempt to settle the case to avoid a lengthy court battle, not to mention potentially prescriptive restrictions to its current operating model, and disruptions to its existing contracts.
Regardless of the DOJ’s success or the progress the suit makes in the courts, in the near term, we expect to see issuers, acquirers, and merchants leveraging the DOJ brief to negotiate improved contract terms. And that includes contracts with all card networks, such as Mastercard and the single message networks.
The Bottom Line
While this lawsuit will take time to play out in court, the allegations have stirred up matters that have long been of concern regardless of one’s role in the payments ecosystem or the networks an organization leverages. Leaders within the payments industry such as banks, networks, fintechs, and processors would be wise to review potential implications and begin to lay out a strategic plan to execute against multiple outcomes.
Leanne Lange and Casey Merolla, both Managing Directors within SRM’s Banking and Payments Practice, have over two decades of experience in the banking industry, advising leading financial institutions on their strategic initiatives. Further inquiries may be made by emailing Leanne at llange@srmcorp.com or Casey at cmerolla@srmcorp.com