Justice Department sues Visa, alleging it has a monopoly in debit card markets

The U.S. Justice Department sued Visa Inc. on Tuesday, alleging the global payments giant illegally monopolized the debit card market, in the Biden administration’s first major antitrust case in the financial services industry.

Antitrust enforcers alleged in a complaint filed in Manhattan federal court that Visa, which handles more than 60% of U.S. debit transactions, entered into a series of agreements penalizing merchants who sought to use alternatives and paid potential rivals to stay out of the market.

Visa is the largest of the payment networks in the U.S. and collects about $7 billion in yearly fees on both debit transactions and so-called card not present transactions where customers use their debit card number online or in apps, according to the complaint.

In its agreements with merchants, the Justice Department said Visa imposed an anticompetitive pricing structure that essentially forced them to route all debit transactions through its network or face stiff penalties. Visa also entered into agreements with technology companies including PayPal Holdings Inc., Apple Inc. and Block Inc., which were developing products that would have challenged its stranglehold over payment networks, paying them hundreds of millions of dollars to stay out of the market, the agency said.

Visa shares were down 4.7% in New York trading at 2:42 p.m.

Visa representatives didn’t immediately respond to a request for comment on the lawsuit.

After Visa, the most prominent U.S. debit networks are run by Mastercard Inc. and Discover Financial Services, though others include Fidelity National Information Services Inc.’s NYCE, Fiserv Inc.’s STAR and Accel.

The Justice Department’s complaint alleges that Visa’s illegal conduct began in 2012 as a response to the Dodd-Frank Act that Congress passed in the wake of the financial crisis. The law required card issuers — which are often banks — to offer at least two independent debit networks to increase competition and to give merchants more of a choice. It also set limits on the fees that banks require retailers pay to accept debit cards, though the law didn’t cap the fees that debit networks themselves charge for processing transactions.

Concerned that the law would generate competition and harm its dominant position in the debit market, Visa began to require merchants to enter into agreements with onerous terms. The Justice Department alleged the company used “cliff pricing,” charging merchants significant fees on transactions unless they routed the vast majority of them to Visa, at which point they would get a discount. The fee structure forced merchants to send most transactions to the payments giant, effectively shutting out smaller debit networks, the complaint alleges.

Visa also sought to blunt the development of new technologies that might allow consumers to bypass its network when shopping online. The most public fight occurred with PayPal, which initially encouraged users to link their bank account to pay for items online. In a 2016 agreement, PayPal vowed to no longer encourage Visa card users to link their bank accounts to its wallets and promised to offer use of the debit cards “as a clear and equal payment option during enrollment and subsequent payments.” In exchange, Visa said it would cut some of the fees it charges PayPal.

Visa reached similar settlements regarding Apple Pay, the digital wallet it introduced on iPhones in 2014 that allows use of debit and credit cards for mobile payments. It had a similar agreement with Block, the fintech company formerly known as Square, that also runs a consumer-payments platform, Cash App.

The Justice Department lawsuit is the culmination of a years-long inquiry into Visa’s business practices born of the firm’s failed acquisition of the financial-technology infrastructure firm Plaid Inc. in 2021. It is also the latest in which antitrust enforcers allege a dominant firm used restrictive contracts to stifle innovation.

Representatives from Block, Apple and PayPal didn’t immediately respond to requests for comment. Plaid declined to comment.

Last month, a Washington federal judge found that Alphabet Inc.’s Google violated antitrust laws by paying $26 billion to companies to ensure its search engine was the default option on smartphones and web browsers. The Justice Department alleged those exclusive deals kept rival search offerings from gaining the users and data needed to grow. Likewise, the Justice Department in May sued Live Nation Entertainment Inc., alleging that its ticketing arm Ticketmaster used long-term exclusive contracts to lock venues into using its technology.

Nylen and Smith write for Bloomberg.