By Leanne Lange
SRM
This fall, the U.S. Department of Justice filed an antitrust lawsuit against Visa, alleging that the corporation created a "web of unlawful anti-competitive agreements to penalize" financial institutions, merchants and processors for using competing payment networks.
The DOJ asserts that Visa holds an unfair, dominant advantage in the U.S. market for general-purpose debit cards and online debit payment services. Through such alleged monopolization, Visa allegedly engaged in anti-competitive practices and has maintained its market dominance through restrictive agreements with competitors.
From the DOJ's perspective, Visa leveraged its monopoly to hamstring innovative and cheaper debit alternatives like PayPal, Apple and Block. Based on the results of the DOJ's lawsuit, the payments industry could face significant impacts.
Since the introduction of the Durbin Amendment and the implementation of Regulation II, regulators have been keeping a close watch on the U.S. debit landscape. Reg II aimed to reduce merchant acceptance costs by controlling debit interchange fees, mandating two unaffiliated networks per debit card transaction and enforcing transaction routing rules.
The transaction routing requirement was intended to bolster competition and drive a race to the bottom.
Contrary to expectations, single message network market shares declined from 39 percent in 2011 to 29 percent in 2021, indicating the potential unspoken desire of Senator Durbin to shift share to single message networks was ineffective.
Additionally, newer payment types like The Clearing House's RTP Network and the FedNow service have not gained significant adoption at the consumer point of purchase, with only 1.5 percent of U.S. payment volume in 2023 being real-time.
According to the DOJ, Visa's arrangements with merchants, banks and payment processors included terms such as penalties, pricing conditions and volume requirements that hindered competition. Implementing this strategy reportedly allowed Visa to secure a significant market share, creating a steep hurdle for new or existing players to compete effectively.
The DOJ claims that in addition to Visa monopolizing markets across the country, consumers may face higher prices for goods and services.
To address these concerns, the DOJ seeks to prohibit Visa from engaging in several restrictive practices that could limit competition. This includes preventing the company from bundling credit and debit services or tying them to incentive programs while also restricting its use of certain pricing tactics, such as "cliff pricing." Moreover, the DOJ wants to limit Visa's ability to directly or indirectly reference competitors in its contracts with clients.
Visa would also be restricted from imposing fees on debit transactions processed through non-Visa networks and from limiting the number of networks that can appear on the back of its branded debit cards. The DOJ also aims to prevent Visa from imposing contractual limitations on its customers' ability to leverage rival networks, alternative payment solutions or fintech companies.
Finally, the DOJ wants to curb Visa's ability to enforce contractual terms that restrict clients from adopting or implementing alternative payment methods, networks or technologies that could reduce their dependency on Visa's services.
Although the DOJ has been monitoring the regulatory ecosystem and tracking data for over a decade, there are several potential countervailing arguments for Visa.
In some instances, consumers were in a worse position following the Reg II changes. Additionally, a study conducted by George Mason University found that Reg II resulted in about one million people, mostly low-income families, losing access to the banking system.
There could be significant changes in the U.S. payments landscape if the DOJ prevails in its case against Visa. As a result of this uncertainty, issuers, acquirers, merchants, networks and fintechs may need to open the hood of their current agreements and evaluate the commercial models driving their operations.
Based on the legal outcome of the case, regulators could make further amendments to Reg II, potentially creating new transaction processing standards to prevent networks from imposing routing restrictions or offering growth incentives through debit card contracts.
This could increase the market share of other payment systems like ACH, FedNow and RTP in pay-by-bank transactions.
Moreover, the absence of these routing incentives means debit interchange rates might become a key factor in routing decisions, potentially driving rates down. Declining debit card network volume coupled with lower interchange rates could impact checking account profitability, potentially leading banks to introduce new fees to recover lost revenue.
Should the case proceed, Visa might face limitations in its ability to use pricing, incentives and contract terms to secure debit volume. A court decision to nullify existing Visa agreements could force the company to pursue alternative strategies to sustain its business.
Restrictions on Visa will cause ripples for other dual message networks, especially when contracts renew or if regulators make changes to Reg II. Mastercard and other competitors might be presented with an opportunity to gain a larger market share in the potential wake of Visa's weakened dual-message debit volume.
Meanwhile, single message networks could benefit from the absence of Visa's merchant incentives by gaining a larger share of transactions and potentially offering lower debit interchange fees as existing agreements expire. These benefits all assume such networks are not precluded from engaging in the same strategies as Visa.
Large merchants may also find themselves in a favorable position to negotiate new pricing and routing terms with networks and acquirers. These changes could lead to more transactions toward competing debit networks but might increase merchant fees.
Acquirers could also see a drop in profitability as they lose out on incentives from Visa and other networks. Fintechs and emerging payment systems such as PayPal and Block would likely promote lower-cost methods like ACH and instant payment rails to their users.
Issuers, acquirers and merchants can be expected to leverage the DOJ action to negotiate improved contracts with all card networks, including Mastercard and single message networks. The lawsuit is still playing out in court, but payment industry leaders should begin planning for potential implications. 
Leanne Lange is the managing director for SRM's Banking and Payments Practice. She has over two decades of experience in the banking industry, advising leading financial institutions on their strategic initiatives. Contact her via LinkedIn at linkedin.com/in/leanne-lange-7b98a86.
The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.
Prev Next
