Visa sued by US in antitrust case over debit card markets

The US Justice Department has sued Visa, alleging the global payments giant illegally monopolised the debit card market, in the Biden administration’s first major antitrust case in the financial services industry.

Antitrust enforcers alleged in a complaint filed in Manhattan federal court on Sept 25 that Visa, which handles more than 60 per cent of the more than US$4 trillion (S$5.14 trillion) in US debit transactions each year, entered into a series of agreements penalising merchants who sought to use alternatives and paid potential rivals to stay out of the market.

“Visa’s unlawful conduct affects not just the price of one thing but the price of everything,” Attorney-General Merrick Garland told reporters in Washington in announcing the lawsuit. “Visa is charging a hidden toll on each of trillions of transactions.” 

Visa is the largest of the payment networks in the US and collects some US$7 billion in yearly fees on both debit transactions and so-called “card not present” transactions, where customers use their debit card number online or in apps, according to the complaint. 

In its agreements with merchants, the Justice Department said, Visa imposed an anti-competitive pricing structure that essentially forced them to route all debit transactions through its network or face stiff penalties.

Visa also entered into agreements with technology companies including PayPal, Apple and Block, which were developing products that would have challenged its stranglehold over payment networks, paying them hundreds of millions of dollars to stay out of the market, the agency said.

Visa shares closed down 5.5 per cent to US$272.78 on Sept 25.

“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,” Ms Julie Rottenberg, Visa’s general counsel, said in an e-mailed statement. “Today’s lawsuit ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving.”

The case opens up a new front in the Biden administration’s antitrust crackdown after actions focused on Big Tech, airlines and retail, among other industries, with mixed results.

After Visa, the most prominent US debit networks are run by Mastercard and Discover Financial Services.

The Justice Department’s complaint alleges Visa’s illegal conduct began in 2012 as a response to the Dodd-Frank Act that Congress passed in the wake of the financial crisis.

The law required card issuers – which are often banks – to offer at least two independent debit networks to increase competition and to give merchants more of a choice.

It also set limits on the fees that banks require retailers to pay to accept debit cards, though the law did not cap the fees that debit networks themselves charge for processing transactions.

Concerned that the law would generate competition and harm its dominant position in the debit market, Visa began to require merchants to enter into agreements with onerous terms.

The Justice Department alleged the company used “cliff pricing”, charging merchants significant fees on transactions unless they routed the vast majority of them to Visa, at which point they would get a discount.

The fee structure forced merchants to send most transactions to the payments giant, effectively shutting out smaller debit networks, the complaint alleges.

Visa also sought to blunt the development of new technologies that might allow consumers to bypass its network when shopping online.

The most public fight occurred with PayPal, which initially encouraged users to link their bank account to pay for items online. In a 2016 agreement, PayPal vowed to no longer encourage Visa card users to link their bank accounts to its wallets and promised to offer use of the debit cards “as a clear and equal payment option during enrolment and subsequent payments”. In exchange, Visa said it would cut some of the fees it charges PayPal.

The agreement with PayPal, which was renewed in 2022 for 10 years, requires the company to route 100 per cent of its debit transactions through Visa’s network, the complaint says.

Visa reached similar settlements regarding Apple Pay, the digital wallet introduced on iPhones in 2014 that allows the use of debit and credit cards for mobile payments. Visa viewed Apple Pay as an “existential threat” and entered into an agreement in 2012 that bars the company from developing technology that would rival Visa’s debit capabilities, according to the Justice Department. In exchange, the complaint alleges, Visa pays Apple hundreds of millions of dollars each year.

The Justice Department lawsuit is the culmination of a years-long probe of Visa’s business practices born out of the firm’s failed acquisition of the fintech infrastructure firm Plaid in 2021. It is also the latest in which antitrust enforcers allege a dominant firm used restrictive contracts to stifle innovation.

Representatives from Apple did not immediately respond to requests for comment. Plaid and PayPal declined to comment. 

In August, a Washington federal judge found that Alphabet’s Google violated antitrust laws by paying US$26 billion to companies to ensure its search engine was the default option on smartphones and web browsers.

The Justice Department alleged those exclusive deals kept rival search offerings from gaining the users and data needed to grow.

Likewise, the Justice Department in May sued Live Nation Entertainment, alleged that its ticketing arm Ticketmaster used long-term exclusive contracts to lock venues into using its technology. BLOOMBERG