By: Gor Bagumyan
Debit networks, such as Visa Inc., offer a secure network for the transfer of money between a consumer’s bank and the merchant’s bank. Merchants decide which debit networks to accept payments through and banks issuing debit cards decide which debit networks to make their cards compatible with. In theory, the choice regarding which debit networks merchants will accept and which debit networks banks issue their cards under boils down to which network charges the least amount in fees. Naturally, a company such as Visa, with 60% of debit transactions running through its networks bringing in roughly $7 billion annually just through processing fees, has a massive advantage when competing and influencing other companies looking to build and revolutionize the way we utilize debit cards. Recently, the United States Department of Justice filed a civil antitrust lawsuit against Visa regarding their alleged anticompetitive conduct. More specifically, the lawsuit alleges that Visa has leveraged its monopoly power within the debit industry in two ways, by charging merchants higher fees, referred to in the complaint as “rack rates”, if they utilize other debit networks for contestable debit card transactions and by entering agreements with other companies looking to innovate the way we use debit cards.
The DOJ alleges in its complaint that the Durbin Amendment gives rise to Visa’s need to control contested debit card transactions through higher rack rates. Passed by Congress in 2010, the Durbin Amendment requires banks who are issuing debit cards to consumers, to include at least one acceptable debit network on the front and back of the card. The iconic Visa symbol on the front of countless debit cards throughout the world, had to be paired with another debit network on the back of each card. Although it was not required to be visible on the physical card, it was intended to give merchants more incentive to accept other debit networks within their payment systems, since debit cards would be issued with more than one network. While this amendment was a step in the right direction for promoting competition, Visa owns the rights to many debit transactions through agreements with merchants and banks. These agreements allowed Visa to ensure that qualifying non-contestable transactions were only routed through Visa’s network.
Realizing that merchants may start using debit networks other than Visa in qualified contestable transactions, it is understandable why Visa would take steps to protect its influence over the market. The complaint alleges that if merchants do not agree to route all debit transactions—both non-contestable and contestable—through Visa’s network, Visa will ultimately charge them higher rates on those transactions. This makes it difficult for smaller debit network companies to compete, allowing Visa to retain control of the market.
The second allegation within the complaint contends that, similar to how Visa coerced merchants with high rack rates into agreements restricting the use of other networks, Visa also threatened rising fintech companies with high fees if they allowed debit transactions through alternatives to the traditional debit network that Visa exercises significant market control over. The complaint identifies two forms of digital wallet payments that pose a risk to Visa, staged digital wallets and pass-through digital wallets. Examples of staged digital wallets include PayPal and Block Inc.’s Cash App, which use several stages to transfer funds to a digital wallet, either pre-paid or from a bank account, to make the purchase with a merchant. Pass-through digital wallets such as Apple Pay, directly utilize the information of the cardholder, replacing the need to use a physical debit card. Although both function differently, there is still a key similarity, which is that merchants and banks who issue debit cards still must accept the payment type/network in order for it to work.
In an attempt to thwart competition, Visa allegedly entered into agreements with companies such as PayPal and Block Inc. to ensure that the transactions on these platforms are routed through Visa’s debit networks. The complaint outlines the dilemma companies trying to promote staged digital wallets face, “agree not to compete with Visa or pay substantial targeted fees that make the alternative networks far less profitable to operate.” While this form of digital wallets is a clear threat to Visa’s vast network, the need to control pass-through digital wallets is not as clear since the payment still goes through the user’s debit card credentials.
Regardless, the complaint alleges that Visa has entered into agreements with Apple where Apple, “may not develop or deploy payment functionality with the aim of competing with Visa, such as creating payment functionality that relies primarily on non-Visa payment processes or payment products.” In return, Apple allegedly enjoys portions of Visa’s “monopoly profits” and reduced merchant fees. Faced with allegations of this magnitude, the outcome of this case could have significant ramifications for everyone involved.
Fintech platforms, such as Cash App and Venmo, have revolutionized the way we transfer money, making it easier than it has ever been. This new dimension of transferring money in a very stagnant market will obviously promote competition where it otherwise has been lacking. However, a ruling in favor of the DOJ is not likely to make a major impact on Visa’s dominance. These smaller companies will still have to grow, and in order to grow they will need profit, which is mainly generated through fees per transaction. While Visa continues to dominate the industry with its ability to offer low fees due to its established success, there is not much of an incentive for merchants alike to burden themselves by accepting brand new networks. On the other hand, promoting a fair market where competition thrives is a core capitalistic value which is favored by public policy within the United States. As the case develops, it will nevertheless be interesting to see how a decision either way will affect companies at the forefront of transforming digital payment methods.
Student Bio: Gor Bagumyan is a second-year law student at Suffolk University Law School and a staff member for the Journal of High Technology Law. Gor received a Bachelor of Arts degree in Economics, with minors in Political Science and Business Management from Clark University in 2023.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
