Swipe or swindle: Why is US going after Visa and how will it affect you?

Every time you use your debit card, you pay a small and often hidden fee to the debit card company.

Most people don’t even notice the small fee because it’s often built into the final price of the product they buy.

But add up those few cents paid by hundreds of millions of users on billions of transactions worldwide, and you get an eye-popping number: $18.8 billion.

That is the global operating income of Visa Inc., the world’s largest plastic card brand in terms of the number of transactions processed in a year.

“Visa is a monopolist in the debit transaction markets that is violating federal antitrust law and inflicting often hidden but significant harm on American consumers and businesses,” US Attorney General Merrick Garland said at a press conference on September 24.

The US Justice Department has filed a civil antitrust lawsuit against Visa for illegally maintaining a monopoly in the debit network markets by signing agreements with card-issuing banks, merchants and competitors.

Calling the allegations meritless, Visa says it earned that money fair and square. Uncle Sam disagrees.

Why it matters

A debit network—like the one operated by California-based Visa Inc—facilitates the electronic transfer of funds directly from a consumer’s bank account to the merchant’s account in a retail transaction.

Besides cash, debit card transactions are often the primary option for lower-income consumers who don’t have credit cards.

In the US alone, over $4 trillion of debit card transactions take place every year. More than 60 percent of those transactions are routed through Visa’s electronic payment network.

The US government alleges that Visa has “unlawfully amassed” the power to extract fees that “far exceed” what it could charge in a competitive market.

Banks and businesses pass along those costs to consumers by either raising prices or reducing quality, according to the US attorney general.

The effect of Visa’s unlawful conduct doesn’t remain limited to the price of the single item that’s being bought or sold. It affects the price of “nearly everything”, Garland says.

The US Justice Department is going after debit card charges, variably known as swipe fee or interchange fee, as part of the Biden administration's efforts to combat rising consumer prices, a major issue in the upcoming presidential election.

How Visa built a so-called monopoly

When a bank issues a debit card, it chooses which electronic payment networks—Visa, MasterCard, UnionPay—will be authorised to process the card’s transactions.

At the same time, the merchant must also choose which payment network it will use to process the transaction whenever a consumer uses their debit card to buy something.

Instead of offering competitive rates to attract merchants and banks through fair means, Visa is alleged to have “virtually eliminated” its competition.

It unlawfully structures its contracts to discourage merchants and banks from using competing payments networks, according to the lawsuit.

“We allege that to maintain this monopoly power, Visa deploys a web of unlawful anti-competitive agreements to penalise merchants and banks for using competing payment networks,” Garland said.

At the same time, Visa “coerces” would-be merchants into unlawful agreements. It promises them “big payoffs” for cooperation while threatening to impose high fees for non-cooperation, he added.

The stick-and-carrot approach has resulted in retail businesses routing a disproportionately large chunk of their payments through Visa guardrails in order to avoid “disloyalty penalties”.

Killing competition

The 134-page federal antitrust lawsuit refers to many instances when Visa used its top-player status in the digital payments industry to eliminate smaller competitors that were trying to come up with cost-effective alternatives.

The lawsuit names several companies that tried to build an alternative to Visa but failed.

“Visa feared entry by potential fintech competitors like Apple, PayPal and Square. It worried these competitors might have… network ambitions, which would threaten Visa’s dominance,” he said.

Visa began “co-opting and neutralising” competition by turning its rivals and potential competitors into “partners” on the condition that they must not develop competing payment products.

Visa offered “payoffs” to incentivise potential competitors to stay out of the debit market. It also “threatened potentially ruinous financial penalties” if up-and-coming competitors innovated in ways that Visa did not like.

What does the US government want?

The US Justice Department has asked the US District Court for the Southern District of New York that Visa be stopped from signing agreements that are anti-competitive in nature.

If the judge agrees, Visa will have to redraw its past anti-competitive contracts and replace them with ones that do not mention any of its rivals either explicitly or implicitly.

It’s the second time the US Department of Justice has sued Visa in recent years for anti-competitive practices. Its case against the digital payments firm in 2021 derailed Visa's $5.3 billion acquisition of Plaid, a startup in the cards segment. The deal fell apart two months later.

The federal lawsuit against Visa’s monopolistic status in the debit card industry is the latest in a string of big-ticket antitrust cases involving blue-chip firms like Google, Nvidia, Microsoft and OpenAI.