Visa-Plaid deal highlights need for more scrutiny of M&A

As the Biden administration begins transitioning leaders into finanical and enforcement agencies like the Department of Justice, they must also consider a new approach to merger enforcement with more strict, updated and concrete rules.

The financial industry is a great place to start this new approach as there are a number of big-name deals pending approval.

Earlier this year Visa announced a $5.3 billion deal to acquire Plaid that would give the credit card giant a rising competitor in data aggregation. Plaid’s new debit card business would have allowed consumers to purchase online products directly from their bank accounts and mobile applications without using payment processors, such as Visa, that have been known to impose harsh transaction fees for services. This acquisition, exacerbating the spate of consolidation in the financial industry, hurts consumers and independent businesses.

While the Justice Department already announced last month its intention to block the acquisition, the agency missed the opportunity to stop similar monopoly-type mergers that are just as patently harmful.

The current merger enforcement regime leaves too much room for subjective and haphazard enforcement. Anemic enforcement in the financial industry has also led to dangerous concentrations of financial risk in the economy.

History, however, can provide solutions to fix these enforcement issues. The incoming Biden administration must instruct the DOJ to enact new bright-line M&A rules similar to its 1968 guidelines.

Such rules stop competitors from merging if the top four firms had a market share of more than 75%, and the combined firms have 4% or more of the market. Additionally, the DOJ would challenge a merger for downstream or upstream vertical dependents if a supplier had 10% or more market share, or an actual or potential customer had 6% or more market share in a downstream market.

Furthermore, unlike today’s guidelines, previous rules did not allow companies to justify their merger based on efficiencies or financial stability between the parties. The strict, bright-line rules removed subjective and inconsistent enforcement from the agencies, allowing federal authorities to zealously and consistently enforce the merger laws.

Strict merger rules enhance competition, increase consumer choice for financial services and decrease systemic risk to the economy. Vigorous merger enforcement is essential because Congress has long confirmed that the concentration of private power by dominant, too-big-to-fail financial institutions creates systemic risk in the economy.

For example, a Financial Crisis Inquiry Report found that a lack of merger enforcement was a primary trigger of the 2008 financial crisis because it exacerbated and concentrated risk in the sector, and the economy more generally.

In line with Congress’s command for aggressive implementation, the merger laws were previously enforced vigorously by federal officials to prevent excessive concentrations of risk and private power. However, today the DOJ’s weak and haphazard merger enforcement has increased systemic risk in our economy.

For example, consider Morgan Stanley’s acquisition of E-Trade Financial this year. This deal decreases the potential custodian options for RIAs because E-Trade served these firms already. Morgan Stanley will also increase its share of assets held by individual and retail investors by $400 billion.

But individual investors will have the drawback of their assets being held at a financial institution with a greater capacity for systemic risk. Meaning, their investments and deposits are less secured.

The Federal Reserve and the DOJ approved Morgan Stanley’s acquisition of E-Trade nonetheless.

A similar concentration of risk is present with Charles Schwab’s recent acquisition of TD Ameritrade Holding. The takeover means that Schwab will be, by some measures, the third-largest financial institution in the world, with combined asset of more than $5 trillion.

Moreover, the acquisition allowed Schwab to consolidate 70% of the assets of U.S. registered investment advisers. Again, despite this excessive concentration of risk, the DOJ approved Schwab’s acquisition.

Strict merger enforcement can also ensure the existence of alternative services for consumers, and incentivize corporations to invest in their own operations rather than engage in cheap growth by acquisition. The Supreme Court confirmed this outcome as a fundamental goal of aggressive merger enforcement in a 1963 decision by stating that growth by “internal expansion is socially preferable to growth by acquisition.”

In the instance with Visa, rather than simply being able to acquire Plaid and destroy a competitor, bright-line merger rules would have forced Visa to invest in its operations and workers to improve its services, and to maintain the existence of an important competitor.

Such a situation would also provide consumers and independent stores greater choice for financial service providers, decreasing the systemic risk that exists in the financial industry.

The DOJ’s lawsuit against Visa’s acquisition of Plaid represents a vital reversal of a decadeslong trend of anemic merger enforcement in the financial industry. But the agency must also pursue a vigorous merger enforcement environment as Congress intended — the Biden administration should instruct the DOJ to implement bright-line merger rules.