The U.S.
"The remedies proposed cut to the heart of Visa's model and — there is no sugar coating it — they appear quite onerous," Barclays said in a research note, adding it would be "more damaging" to Visa than other regulations or restrictions.
Prior regulatory actions against card networks, such as the Durbin Amendment to the Dodd-Frank law, targeted technical practices or pricing, according to Barclays.
The DOJ's suit targets underlying business strategies such as bundling, exclusivity and partnerships. That makes the case potentially more damaging, but also harder to win, according to Barclays.
The DOJ suit follows a judge's rejection of a settlement between merchants and the card networks that would have lowered interchange fees, a settlement that both
The debit suit could impact these legal and regulatory issues, forcing the card networks to lower fees and change how they sell and negotiate with partners and clients.
"Obviously the merchants have been upset about debit interchange fees for years, and this lawsuit certainly won't hurt their efforts to keep those fees down," said Ronald Mann, a law professor at the Columbia School of Law. "It remains to be seen, though, what courts will think about the DOJ's arguments."
Could Apple, Block and PayPal suffer?
The DOJ's complaint mentions merchants, merchant acquirers, issuers and digital wallets, which are cited as recipients of incentives to use Visa for debit routing.
The complaint cites Visa agreements with PayPal to commit 100% of debit volume to Visa from year four to the end of a 10-year agreement; a Block commitment to route 97% of Cash App debit transactions to Visa; and a Visa promise to lower fees charged to Apple in exchange for Apple not competing or steering payments to other rails.
"If, and this is a big if, Visa were precluded from paying incentives in its debit business, many stakeholders would likely face a near-term negative impact from reduced incentive dollars," Barclays said in its note.
Barclays also said the most popular digital wallets have benefited from Visa's scale with consumers and merchants, and that merchants "likely" enjoy net transaction economics that may be better than what they would get if these incentives were discontinued.
Block, Apple and PayPal did not return a request for comment.
Curtailing these incentives would be part of a DOJ effort to curb other financial practices that the government says harms competition. The government wants to restrict Visa's ability to reference rivals in contracts, impose fees on debit transactions not routed over Visa's network and limit partners' ability to use other payment methods.
The DOJ says more than 60% of U.S. debit transactions run on Visa's debit network, with Visa charging more than $7 billion each year in payment processing fees. (TD Cowen estimates Visa's debit market share is 57%).
This scale and market share contribute to Visa practices that thwart competitors, according to the DOJ. For example, Visa has entered agreements with merchants and banks that allegedly penalize parties that route transactions to other debit networks or alternative payment systems. This enables Visa to "lock up" debit volume and "smother" lower-priced competitors, the DOJ said.
Visa additionally persuades potential competitors to become partners rather than competing against it. The card brand uses leverage to impose volume commitments on merchants and banks that are priced in a way that extracts "disloyalty penalties" unless "nearly all debit volume runs over Visa's rails, making it unaffordable to use non-Visa rails," the DOJ said.
Visa also attempted to stop rival technology firms with network ambitions through paying competitors to act as a partner rather than innovating, the DOJ alleged.
The card brand "co-opted" competition out of fear of losing share, revenue or being displaced by another debit network, the government alleged. The DOJ gives Visa's attempted acquisition of financial data company
The DOJ did not reply to a request for comment. In a release, Attorney General Merrick Garland said, "We allege that Visa has unlawfully amassed the power to extract fees that far exceed what it could charge in a competitive market.
"Merchants and banks pass along those costs to consumers, either by raising prices or reducing quality or service. As a result, Visa's unlawful conduct affects not just the price of one thing, but the price of nearly everything."
Julie Rottenberg, general counsel for Visa, said the DOJ lawsuit ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving, adding that anyone who has bought something online or checked out in a store knows there is an ever-expanding universe of companies offering new ways to pay for goods and services.
"We are proud of the payments network we have built, the innovation we advance, and the economic opportunity we enable. This lawsuit is meritless, and we will defend ourselves vigorously," Rottenberg said in an email.
Lining up
Merchant groups wasted little time pushing for more government-backed concessions from the card networks.
The National Retail Federation responded to the lawsuit by asking Congress to advance the Credit Card Competition Act, which would extend Durbin's routing requirement to include credit cards in addition to debit.
The NRF also pushed for lower swipe fees, or interchange, pairing the DOJ suit with the recent Supreme Court decision in the Corner Stop case, which in theory made it easier for merchants to file suits over payment fees.
"The DOJ is taking action on Visa's debit card practices, but that is just the tip of the iceberg," said Stephanie Martz, NFR chief administrative officer and general counsel in a release.
In a statement on the DOJ suit, Leslie Sarasin, president and CEO of the Food Industry Association, urged the Federal Reserve to move ahead with updates to debit card fee caps that were passed 13 years ago.
"Enacted more than a dozen years ago, the law fosters greater competition in the debit card market by allowing debit transactions to be routed over more than one network. We also hope the Federal Reserve will finalize its rulemaking on the debit regulated rate to adjust fees for the first time since the law was passed to ensure these fees are both reasonable and proportional as mandated by Congress," Sarasin said.
The NRF and FMI did not comment for this article.
Winning the suit won't be easy for the DOJ. The government is claiming that more than half of Visa's debit transactions are noncontestable or effectively lack a second network option, which a Jeffries research note said is a "less convincing" argument of anticompetitive behavior.
"In our mind, the use of volume-based incentives is pro-competitive, even if they result in disproportionate market share," Jeffries said.
The DOJ suit and other legal battles and regulations reveal confusion in the payments industry, according to Brandi Gregory, managing director of Cornerstone Advisors' contract negotiation and payments practices division, who said the nature of the debit routing models provides choice.
Visa and Mastercard operate dual messaging networks, meaning there are separate payment messages for authorization and clearing, while the alternative networks are mostly single messaging systems that combine authorization and clearing, a faster but
Since most alternative networks have added dual messaging capabilities, that suggests there is a choice for merchants in how to process transactions between networks and messaging options, Gregory said. "Anti-trust equals no choice or lack of choice."
The fate of the proposed
If the Capital One acquisition is approved with no restrictions, there will be a card issuer that will own both dual and single message transactions, which could lead to a closed-loop transaction ecosystem, Gregory said.
"They could charge those acquirers whatever they wanted as they would own both sides of the transaction," she said. "Every lawsuit that comes out until the Capital One acquisition receives regulatory approval is just unnecessary noise that is taking the eye off that potential transaction."
Courts have not been uniformly receptive to some of the more aggressive antitrust enforcement actions the government has brought recently, according to Mann. "And of course there is so much at stake here that it might well be resolved by settlement," the professor said. "My guess is that a settlement would be much easier for Visa to tolerate if it involves limits on what they can put in contracts, as opposed to direct limits on pricing."
For example, the suit emphasizes Visa rules that link fee levels to merchant volume. "I could imagine Visa having flexibility in that area," Mann said.
