Preparing for a Shake-Up in the Debit Network Markets

Last fall, the 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, the agency argues that Visa engaged in anti-competitive practices and has maintained its market dominance through restrictive agreements with customers and competitors.

From the DOJ’s perspective, Visa hamstrings innovative and cheaper debit alternatives such as PayPal, Apple and Block. The results of the DOJ’s lawsuit could significantly impact the payments industry.

Allegations of a Debit Monopoly
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 prevent the company from bundling credit and debit services or tying them to incentive programs and to restrict its use of certain pricing tactics. The DOJ also 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 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.

Visa’s Potential Counterarguments
Although the DOJ has been monitoring the regulatory ecosystem and tracking data for over a decade, there are several potential countervailing arguments for Visa, including:

• Merchant savings and routing control. Regulation II gave merchants explicit control of routing transactions across two unaffiliated networks, promoting choice in the routing process.

• Incentives loophole. Although Reg II provided merchants with routing choices, it did not prevent networks from incentivizing acquirers or merchants to favor a particular network.
• Lack of consumer benefits. There is evidence indicating that the adoption of Reg II did not result in lower prices for consumers. Both the Federal Reserve Bank of Richmond and the University of Chicago found that consumers did not experience lower retail prices. In some instances, consumers were in a worse position following the Reg II changes.

• Sufficient competition in the payments landscape. In the U.S., debit cards only account for 30% of consumer payments. Alternative payment options comprise the remaining 70%, suggesting the payments ecosystem remains competitive. This could weaken the DOJ’s assertion of Visa’s monopoly.

How the Industry Should Prepare
There could be significant changes in the U.S. payments landscape if the DOJ prevails. As a result of this uncertainty, issuers, acquirers, merchants, networks and fintechs may need to evaluate the commercial models driving their operations.

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.  

The absence of 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, leading banks to introduce new fees to recover lost revenue.

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 could gain a larger market share in the wake of Visa’s weakened dual-message debit volume. Single message networks could gain a larger share of transactions and offer 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.