BARAK KOREN—Americans spend over four trillion dollars using debit cards each year. But what really happens behind the scenes when you pull out your debit card at the grocery store to tap and pay? To illustrate, say you make a fifty-dollar purchase using your Visa debit card, issued by Chase Bank. This transaction will charge a fee to the merchant from whom you are purchasing—say, forty cents. That fee is paid to the merchant’s bank, who in turn must pay an interchange fee of twenty cents to Chase (the issuer) and a network fee of five cents to Visa (the network). Chase must then also pay a five-cent network fee to Visa. So why is Visa, a company consumers interact with daily, now in the DOJ’s crosshairs?
Visa is an extremely dominant player, holding over sixty percent of the market share of United States’ debit transactions. While yielding this market power (and possible monopoly power), there are two main “buckets” of conduct the DOJ has alleged as violations of the Sherman Act. The first bucket of conduct is focused on how Visa maintains its dominance by paying its competitors to not compete. For example, companies such as Apple, PayPal, and Square, who would otherwise be able to create networks competing with Visa, have entered into agreements with Visa to use their platforms to aid Visa’s transactions in exchange for a share of the profits. The other bucket of conduct pertains to how Visa locks merchants into the Visa network by offering them a volume discount. If the merchant routes a certain volume of transactions through Visa’s network, Visa will send some money back to the issuer and the merchant’s bank. On the other hand, if the merchant fails to meet Visa’s threshold, Visa will impose higher rates on all of the transactions.
So, what would a DOJ victory mean for merchants and consumers? Would consumers see prices go down? Well, that is not so clear. First, network fees make up a small amount of the total transactional costs merchants pay when processing a debit card transaction. This means that even if the court orders some relief in relation to these fees, it would likely only save merchants and consumers pennies. Another thing to consider is Visa’s network effect. Because so many people use Visa, even if a competitor offers lower fees, it may be detrimental for merchants to switch when a large percentage of their consumers want to pay with Visa. Therefore, it is not worth paying lower fees with a competitor if most of a merchant’s customers can no longer buy from them. At the same time, Visa can use its strong network to provide benefits to merchants and consumers alike.
However, if the court could enjoin the agreements (or at least provisions within them) between Visa and companies like Apple, they could be paving the way for disruptive entry. By incentivizing firms like Apple to compete against Visa, consumers could see serious innovation in the field with competitive pricing from companies who have the capital to stand up to Visa. This is where consumers should get excited. Although consumers do not know exactly what would happen if the court were to take this route, “it’s like a lottery ticket that could pay off big,” says John Newman, a former deputy director of the FTC’s Bureau of Competition and current antitrust law professor at Miami Law. Even smaller fintech networks, such as checkout software firm Bolt, could gain leverage in disrupting the market.
Overall, it does not seem likely that this dispute will settle. Visa, a company very secure in its market position, would probably only be intimidated by the prospect of a breakup or individual liability for its executives, neither of which are a real possibility here. Further, the head of the DOJ’s antitrust division, Jonathan Kanter, has referred to corporate middlemen like Visa as “tyrants.” Consequently, this lawsuit is likely to drag on for years. Whether there will be a serious benefit for consumers depends on what kinds of activity the court will enjoin, and how fintech players decide to enter the market.
