The U.S. Justice Department (DOJ) has initiated an antitrust monopolization case against Visa for various practices related to its debit-card services. The complaint centers on two primary theories of harm. The first is that Visa offers volume discounts in a manner that locks in merchant banks (or “acquirers”) into Visa’s debit-card network, which deprives rival networks of “scale” and reduces the overall level of competition in the debit-card market. The second is that Visa is buying off potential competitors such as Apple with agreements that effectively share Visa’s monopoly profits so that Apple becomes an invested partner, rather than a potential threat.
While Visa is clearly the market leader in the debit-card industry, there are several considerations when assessing whether Visa’s market position is due to superior service and innovation, or due to practices that genuinely harm consumers.
First, while the headline is Visa’s 60% market share, the reality is that, for a $60 debit-card transaction, the network fee ultimately collected by Visa is $0.14, or 0.23% of the transaction. (Note: The overall “interchange fee” would be $0.24, which includes the network fee as well as fees that go to card issuers such as Chase and Capital One; these fees can vary based on the type of transaction and whether the card issuer falls under the Durbin amendment.) Even the DOJ’s complaint acknowledges that Visa’s “debit transaction fees make up a relatively small fraction of each transaction.” Thus, the economics of the debit-card market cast doubt on the position that Visa’s practices cause higher retail prices or lower quality.
Second, the DOJ’s leading theory of harm is based on Visa giving loyalty rebates to partner merchants and banks. Loyalty rebates involve giving discounts once a volume threshold is reached. The DOJ alleges these loyalty discounts act as de-facto exclusive agreements that disincentivize merchant banks from routing debit transactions to Visa’s rivals. The idea is that partner banks want to get the best discount, so they stay with Visa for almost all their transactions even though, without the discount, the banks may try other debit networks for some of their transactions.
As a general principle, theories of harm premised on giving too much of a good thing (e.g., low prices, generous discounting) face an uphill battle in court, for a couple of reasons. First, challenging aggressive pricing and discounting could falsely condemn what is ordinarily considered the paradigm of competition. This “error cost” from improper enforcement could be substantial, and may result in significant overall harm by disincentivizing beneficial practices. For instance, courts have established a high bar to prove a predatory-pricing claim, which involves a theory that prices are set below cost in a manner to drive out competition and ultimately monopolize a market. Similarly, rebates used in a manner to incentivize partners to use more of one’s product is fundamentally the purpose of all rebates—regardless of whether the firm has market power.
Therefore, while aggressive competition may make life more difficult for a firm’s competitors, the consumer welfare standard examines how the disputed practice ultimately impacts consumers. Thus, during the trial, the court will seek credible evidence from the DOJ that Visa’s rebates are harming merchants and partner banks. Ultimately, as one researcher has observed, “[s]ince loyalty rebates are an efficient and healthy form of competition, plaintiffs and competition authorities that allege anticompetitive foreclosure as a result of loyalty rebates should generally carry the burden of proving a restriction of competition.” The point is that loyalty rebates can have both procompetitive and anticompetitive rationales; thus, the key economic consideration is the actual contestable share of business that the program “locks up” from rivals.
Further, the DOJ’s loyalty discount theory is powered by the position that, when Visa gives rebates, this deprives rivals of the “scale” necessary to compete. In fact, the complaint uses the word “scale” 40 times; yet, curiously, nowhere does the DOJ actually specify the scale needed to compete. Further, it strains credibility to suggest that other billion-dollar companies such as Mastercard, American Express, and Discover lack the resources and scale to offer a competitive product.
Third, when examining the allegation that Visa is suppressing potential competitors such as Apple, PayPal, and Square by making them partners, there are several points to consider. We certainly do not want firms “buying off” nascent and potential competitors; thus, antitrust agencies should rightly be vigilant to prevent such practices. There are, however, legitimate reasons to partner with firms that not only promote their joint interests, but importantly for antitrust purposes, also promote the interests of consumers.
Focusing on Apple, it appears that Apple first launched a debit-card partnership with Discover in 2017. Yet in 2022, after five years, Apple switched to Visa. Given that the number of active iPhones grew 64% between 2017 and 2022, it is puzzling why Discover did not become more of a market leader when it had such a powerful partner such as Apple. What this episode illustrates is that partnerships, in and of themselves, do not determine market success. Additionally, given Apple’s prior partnership with Discover, it is clear that Apple values debit-card partners for reasons other than anticompetitive ones. It will be critical to understand the nature of these partnerships and the level of investments each partner makes. This will help determine whether the partners’ goal is to invest in each other and expand output, or whether the intent is something else.
While the complaint paints a counterfactual world where smaller networks would thrive “but for” Visa’s conduct, there are legitimate questions whether those alternate systems would genuinely offer merchants lower fees. Perhaps an alternate explanation for Visa’s success, rather than an anticompetitive one, is that the stakes are high when facilitating trillions of dollars in merchant exchanges with consumers. The growth of payment systems like debit cards is contingent on the network simply “working.” Yet developing a seamless payment platform takes immense levels of investment and ingenuity. Thus, considerations such as fraud detection and protection, dispute resolution, customer service, speed and reliability of transactions, and universality (including acceptance when traveling abroad) are key considerations when consumers and merchant banks make choices.
Overall, the DOJ’s complaint paints a grim picture of Visa’s business practices. Yet a close examination of the theories of harm suggest that this is a case where the economic evidence will be paramount. While it may be easy to assert that loyalty discounts harm consumers by denying smaller networks “scale,” it is an entirely different endeavor to demonstrate that, in the “but for” world, smaller rivals would be thriving, and fees would be lower. Further, business partnerships are routine. There is therefore no a priori reason to believe Visa’s partnerships harm consumers.
Ultimately, antitrust should remain an area of law where presumptions based on “big” and “billions of dollars” do not guide decisions, but whether practices ultimately benefit markets through lower prices, greater service, high quality, and more innovation.