In early October, the U.S. Department of Justice (DOJ) filed an antitrust lawsuit against Visa, calling into question how it retained and gained debit card market share in the post-Durbin era. Visa, the DOJ alleges, has created a “web of unlawful anti-competitive agreements to penalize” financial institutions, merchants and processors for using competing payment networks.
Setting aside whether Visa in fact has monopolized debit payments, executive teams and boards must determine how the suit could affect interchange revenue, checking account monetization, and even opportunities for institutions to play a greater role in payments.
Here are the key points of the DOJ suit and what the DOJ wants to change, and four questions for banking institutions to consider.
What Is the DOJ’s Claim?
The DOJ alleges the card network has squashed innovation, and limited the growth of lower cost debit alternatives from companies such as Apple, PayPal, and Block, through anticompetitive acts to increase, maintain, or protect its monopoly.
The lawsuit alleges that Visa has enacted agreements with potential and current competitors not to compete. The DOJ also claims Visa’s agreements with merchants, issuers, and acquirers use penalties, pricing terms, volume commitments, and other terms that restrain competition, which has resulted in Visa locking in a substantial share of the debit market, making it difficult for existing or potential rivals to challenge Visa’s share. The DOJ claims “there is a dangerous probability that, unless restrained, Visa will succeed in monopolizing each market in the United States,” resulting in higher consumer goods and services prices.
The Durbin Amendment was introduced in 2010 within the Dodd Frank Act and directed the Federal Reserve to sets standards for debit card interchange fees and network routing. The Federal Reserve then finalized Regulation II (“Reg II”) in 2011, which capped debit interchange, required the availability of two unaffiliated networks for each debit card transaction, and enforced new transaction routing rules.
Reg II’s transaction routing requirement was expected to improve debit network competition and result in secondary or single message networks gaining a larger share versus global or dual message networks. However, volume data from both before and after Reg II suggest that the opposite is true as single message network market share decreased from just over 39% in 2011 to 29% in 2021, according to the Federal Reserve.
Beyond the decline in single message network share of volume, other emerging payment types such as faster payments solutions, have failed to gain substantial volume. Neither The Clearing House Association’s RTP rails nor the government’s FedNow instant payments capability has gained traction for use at the consumer point of purchase. According to ACI Worldwide, only 1.5% of US payment volume was real time.
The DOJ wants Visa to refrain from the following practices:
- Bundling credit and debit services, and/or incentives
- Imposing pricing/incentive structures, such as cliff pricing
- Referencing competitors, implicitly or explicitly, in contracts
- Imposing fees on debit transactions routed over non-Visa networks
- Limiting, by contract or other means, the number of back-of-card networks on Visa-branded cards
- Agreeing, implicitly or explicitly, not to compete with other networks, fintechs, and payment providers
- Imposing contractual limitations on the use of payment methods and payment rails that may compete with card-not-present or general-purpose debit network services
- Imposing contractual limitations on the ability of Visa’s customers to offer their own payment networks or methods or adopt new technologies that may disintermediate Visa
What Might These Changes Mean for Banking Institutions?
If the DOJ succeeds in its case against Visa, issuers, acquirers, merchants, networks and fintech players should expect new dynamics in the U.S. payments ecosystem and anticipate a more uncertain marketplace. All parties in the U.S. payments ecosystem will want to anticipate potential shifts as entities consider the commercial frameworks driving their business models.
As a result of this litigation, regulators may make additional amendments to Reg II. They may create new processing requirements for transactions, removing a network’s ability to add routing restrictions and implement growth incentives in debit card agreements.
Adjustments to incentives and pricing structures could mean competing payments like ACH, RTP and FedNow gain foothold in the pay-by-bank space. This could leave networks with interchange rates as the main negotiating point for routing, leading debit interchange into a race to the bottom. Both reduced volume over traditional debit card networks and lower interchange could have a significant impact to future checking profitability, leading banks to create or increase fees to recoup revenue.
Banking executives should now consider:
How might the DOJ case enable ACH, RTP and FedNow to gain a greater foothold in payments?
The DOJ alleges that Visa uses anticompetitive tactics to limit the growth of competing payment types.
Some of these tactics incentivize the use of Visa products, causing the net cost of enabling pay-by-bank offerings to be greater than that of Visa products. In theory, if these pricing and structural barriers are removed, these payment options will have a greater opportunity to be enabled by financial institutions and merchants broadly.
PayPal, for example, – which processes an average 41 million transactions per day – has announced changes to its merchant agreement in the wake of the DOJ lawsuit to support bank payments in addition to card payments. These types of changes may pave the way for RTP and ACH payments to be more freely accepted at the point of sale.
Dig deeper:
- How U.S. Instant Payments Can Catch Up to the Rest of the World
- FedNow Turns Instant Payments into a Must-Have for Banks and Credit Unions
- Instant Payments: What FedNow Could Learn From Brazil’s Pix
How can institutions prepare to take advantage of any openings?
Understanding that a portion of customers will embrace these new payment types, FIs should evaluate how these payments fit into growth plans and how to implement them, if at all. They can do this by looking at relevant use cases across customer segments and identifying opportunities for additional capabilities. FIs that have not enabled these payment types can also explore accelerating implementation if it makes sense for the institution.
For most banking institutions interchange is a major component of their fee income, and those revenues often “subsidize” checking accounts. What effect might the DOJ suit have on interchange?
A network’s role in the payments system is to expand and maintain both merchant and issuer participation to grow volume over the network. To do this, a network has multiple levers that it can use to maintain the balance, including interchange, pricing structures, fee levels, and incentives.
If Visa can no longer use its current methods, it may be left with debit interchange rates as the main negotiating point for transaction routing with merchants, starting a race to the bottom.
Where should executives focus when planning for the future of their interchange revenue, and for the future of their role in payments?
Banking institutions are experiencing downward pressures on revenue (not just interchange) from regulation, legislation, litigation, and innovation. Executives should expect that this downward pressure will continue and consider alternative revenue and efficiency opportunities. Revenue opportunities might include small business and commercial applications of these new payment types, monetizing data, evaluating pricing and yield holistically, or repricing certain client segments. Efficiency efforts might include reducing back-office costs, vendor/partner costs, and fraud losses.
Executives should also monitor where customers are using cash and check and implement strategies to increase the total number of digital transactions including small ticket items or even supplier enablement for commercial customers.
How could the suit affect banking institution contracts?
Regardless of the DOJ’s success or the progress the suit makes in the courts, in the near term, we expect to see issuers, acquirers, and merchants leveraging the DOJ brief to negotiate improved contract terms. And that includes contracts with all card networks, such as Mastercard and the single message networks.
While this lawsuit will take time to play out in court, the allegations have stirred up matters that have long been of concern regardless of one’s role in the payments ecosystem or the networks an organization leverages. Leaders at banks and credit unions would be wise to review potential implications and begin to lay out a strategic plan to execute against multiple outcomes.
Leanne Lange and Casey Merolla are Managing Directors for SRM’s Banking and Payments Practice. Both have over two decades of experience in the banking industry, advising leading financial institutions on their strategic initiatives. Contact Casey at [email protected] or Leanne at [email protected] with questions.