Visa’s retail clients and fintech competitors may find their market positions strengthened in the wake of the federal government filing an antitrust lawsuit against the card network last week, industry players say.

Federal prosecutors alleged that Visa, the largest U.S. card network, established a monopoly in U.S. debit card market by entering contracts with fintech rivals that enticed some to avoid competing with it, and threatening others with higher prices if they did. It acted similarly with merchant clients and bank partners, essentially coercing them into using its services, the lawsuit said.

In a statement last week, Visa’s general counsel, Julie Rottenberg, said the lawsuit “ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving,” The San Francisco-based company will “vigorously” defend itself, she added.

The Justice Department’s move will set Visa back on its heels, not only with respect to dealing with those competitors, partners and clients, but also in regard to ongoing civil antitrust litigation brought by merchants, industry professional said in interviews.

That means that with merchants, it may be less likely to impose additional fee increases, one of which has historically been added this month. With fintech rivals, large and small, it may be more careful in partnership agreements not to wield its leverage. And in seeking to settle a current billion-dollar lawsuit brought by merchants, it could be more amenable.

“When you get sued, you don’t want to create additional evidence,” said Lloyd Constantine, an attorney whose New York law firm Constantine Cannon has been suing Visa on behalf of merchants for years. With private litigants that may be less the case, but “not when the government is involved,” Constantine said in an interview last week.

His firm represents a group of retailers and other merchants that has been waging an antitrust battle against Visa for nearly two decades which is scheduled to go to trial next October.

Such private litigants and the federal government have leapfrogged each other in bringing antitrust claims against Visa, with the Justice Department also blocking the company’s $5.3 billion acquisition of Plaid in 2019. In addition, regulators from the Federal Trade Commission reportedly investigated the company in recent years as well.

Now, DOJ’s action could give merchants more leverage as they seek to negotiate a new injunctive settlement with Visa, and Mastercard, after an earlier proposal on that front was rejected by a federal judge in June. (A related $5.5 billion settlement over damages is in the process of soliciting merchants claims.)

Against that backdrop, Visa added $1.5 billion to a litigation escrow account last week, on Sept. 24, the same day the federal lawsuit landed. 

In the payments marketplace, fintechs may gain at Visa’s expense, Constantine noted. The card network must be “extraordinarily careful” now in dealing with not only major technology companies, but also those fintech startups that are “potential disruptors,” he said.

“The fintechers are given a tremendous boost,” he said, explaining that Visa will understand that any “nasty memo, email, phone call, etc is going to be reported immediately to the to the DOJ antitrust division team.”

The 71-page U.S. lawsuit noted targets of Visa’s tactics included big tech companies such as PayPal, Apple and Block, but also smaller rivals.

Checkout software firm Bolt is one of those fintechs that could benefit. The company’s CEO, Justin Grooms, said he senses the latest government action against Visa, along with other antitrust litigation over Apple’s payments features, resulting in seismic changes for the industry.

“Some of the walls in the market that have been there for years are starting to show some signs of stress, and it'll be fascinating to see how it all plays out,” Grooms said in an interview last week.

While Bolt works with Visa, Grooms sidestepped any detailed discussion of that relationship, other than to say he doesn’t see this as a moment to squeeze Visa. Rather, he expects it will empower forward-looking executives within Visa, and Mastercard as well, to push those companies toward new, innovative payments tools and beyond their core card business, perhaps delving into real-time payments.

That pressure doesn’t just come from fintechs, it comes from merchants, Grooms said. “Merchants have been working for a long time to to get around their minimum spend requirements, or their minimum allocation requirements with Visa,” he said.

Some additional non-network payment alternatives may start to surface as soon as the year-end holiday season, Grooms said, explaining that the burst of shopping activity can help propel new technologies with consumers willing to try new digital options.

“A lot of fintechs, like us, are have been working really hard to be able to demonstrate there are real other options too, for safe and secure and convenient payments,” Grooms said.

What retailers don’t want to see is another fee increase. Grooms said he’s heard of at least one large retailer already sending the message to Visa, through it’s processor, that any such hike shouldn’t be in the offing.

All of those marketplace dynamics could have the effect of reducing Visa’s wherewithal in the industry. “Visa’s power could wane and others could become more influential,” said Keith Barnett, an attorney with the law firm Troutman Pepper who specializes in the industry.

But even if there is such change in the industry, Visa, with its $32.7 billion in annual revenue and $17.3 billion in profits last year, will be well-equipped to weather the upheaval. Indeed, the DOJ lawsuit recounted how the Durbin Amendment, one of the biggest pieces of legislation aimed at reining in Visa, essentially backfired by allowing Visa to thrive on smaller debit card fees while tiny rivals could not.

“This is a less important structural change (than Durbin), in my mind, and I would be very surprised if Visa doesn't navigate these waters just as smoothly as it did Durbin,” said Andrew Jeffrey, a William Blair analyst who follows the industry.

The company has demonstrated it can offset an adverse impact in one segment, by shifting it’s attention to another business play, Jeffrey said. For instance, Visa may increase its emphasis on tapping the data that runs across its network, or pursue more acquisitions, he explained.

“Visa has shown, historically, a remarkable capacity to adapt to industry changes,” Jeffrey said.

By Lynne Marek on Oct 3, 2024
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