We are providing a series of fintech related presidential election discussions leading up to November 5th. As a follow up to the DoJ’s antitrust lawsuit against Visa we are opining on the potential impact of a Trump and Harris administration on that complaint.
High-level thoughts
Per our previous newsletters, a second Trump administration is likely to continue a regulation light, pro big business approach, consistent with its previous term. What this means for Visa regarding the below DoJ filing is less clear.
Let us explain.
We think there is a chance the case could be dropped because, in our opinion, there is not an abundance of evidence that either the consumer or merchant has been harmed. In other words, have consumers really been denied access to purchasing non-discretionary goods and services because debit card processing fees were too high? Were there lost sales to the merchants? In the current ecosystem, who loses and where is the victim?
As a generalization, using the Federal Reserve for baseline numbers, the average transaction fee of a debit card is $0.34 or 3/4 of 1% for a $46.50 purchase. For comparison purposes, a credit card transaction fee at the retail point-of-sale for a SMB is around 2%-2.5% of the sale price or 3x more expensive than debit cards. Meanwhile, cash costs retailers 5% to process (manage, count, record, store, transport and deposit at a bank), or at a minimum, is 5x more expensive. If indeed there is a second Trump administration, it may determine Visa’s debit card transaction network is not punitive to consumers and merchants compared to alternatives. So why intervene?
And if it goes the other way?
A Harris administration may view the below case very differently. There is little doubt about Visa’s dominant market share, ubiquitous infrastructure, and the merchant’s contractual debit card transaction volume obligations (directing most if not all Visa debit card transactions to the Visa network), is anticompetitive, and thus does in fact “harm” both consumers and merchants. Visa’s footprint is going to raise questions, and many retailers feel forced to accept the Visa brand because of the company’s market share. In a fairer world, shouldn’t an alternative network be available to process Visa’s transactions? On the one hand we see the DoJ’s point, but on the other hand, we are only talking about $0.04 (Visa debit assessment fee) per transaction.
So it appears to us the remarkable profitability of Visa, with 65% plus operating margins and incredible technological prowess, has attracted the DoJ’s attention and made them wonder a) how did Visa get there, and b) what is Visa doing to perpetuate this dominant market position? These are legitimate questions, but remember, if the DoJ prevails, any alternative network would have to operate in a narrow cost envelope of less than what Visa is charging.
Synopsis of the DoJ Complaint
On September 24, 2024, in the US District Court for the Southern District of New York, The Department of Justice (DoJ) filed an antitrust lawsuit against Visa alleging the company illegally maintains a monopoly over debit network markets by using its market position to stymie competitors and prevent others from introducing new and innovative alternatives.
According to the complaint: “We (DoJ) allege that Visa has unlawfully amassed the power to extract fees that far exceed what it could charge in a competitive market,” said Attorney General Merrick B. Garland. “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. Through this lawsuit, the Justice Department seeks to restore competition to this vital market on behalf of the American public.”
The filing states that more than 60% of debit transactions in the United States run on Visa’s debit network, allowing it to charge over $7 billion in fees each year for processing those transactions. Visa has built a massive presence on both sides of the debit market — with merchants and their banks and with consumers and their banks — constructing an “enormous moat” around its business. Visa has engaged in a deliberate and reinforcing course of conduct to cut off competition and prevent rivals from gaining the scale, share, and data necessary to compete for customers’ business:
• Smaller Debit Networks: Visa coerces merchants to route all or nearly all debit volume over their payment rails and if they don’t these agreements are priced so that large disloyalty penalties can be imposed. In effect, merchants cannot afford to use Visa’s smaller competitors for transactions where options do exist, even when those competitors offer lower per-transaction prices.
• Tech Entrants: Visa feared that some technology companies and fintech startups with “network ambitions” would cut Visa out as the middleman between merchants, consumers, and their banks by offering a better or cheaper payment product. Visa aimed to stop that development by entering into agreements to pay potential competitors to partner instead of innovating. As Visa’s then-CFO put it: “Everybody is a friend and partner. Nobody is a competitor.”
1(Covered Durban Amendment transactions which represents close to 70% of all Visa debit transactions)
