Transcript of The Justice Department Takes On Visa

If you pull out your wallet and take a look at your debit cards, what logo do you see in the lower right corner? I asked our colleague, Angel Au Young, the same question. Angel, do you have your wallet on you by any chance?

Yeah, I do, I think.

If you wouldn't mind pulling out maybe two or three cards that you have there and naming the network on each card.

Visa and Visa. Yeah. Nothing else, just Visa. I mean, I have an Amex card from the journal, but Visa and Visa.

Wow. Odds are you're like angel. Most of your cards will also be Visa cards. That's because Visa owns the largest payments network in the US. It connects tens of thousands of banks to millions of businesses, facilitating everyday transactions. Visa dominates the debit market, but how the company became so dominant is contentious, and it's part of a new antitrust lawsuit from the Department of Justice. Last week, attorney general Merrick Garland announced that the DOJ is suing Visa.

We allege Visa is a monopolist in the debit transaction markets that is violating federal antitrust law and inficting often hidden but significant harm on American consumers and businesses.

That's him speaking at a press conference last Tuesday.

We allege that to maintain this monopoly power, Visa deploys a web of unlawful anti-competitive agreements to penalize merchants and banks for using competing payment networks. At the same time, it coerces would be market entrance into unlawful agreements not to compete by threatening high fees if they do not cooperate, and promising big payoff if they do.

Shortly after this lawsuit was filed, Visa came out with a statement that called this lawsuit from the Justice Department meritless, and they said that they will defend themselves vigorously.

How big a deal is this lawsuit?

It is a big deal. I've been told by sources that this lawsuit, it is incredibly impressive. That's some of the facts that the Justice Department has pulled up are damning, and it will be interesting to see how Visa will fight this.

Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Monday, September 30th. Coming up on the show, the Department of Justice Takes on Visa.

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The Justice Department's case against Visa is the latest in a series of antitrust lawsuits from the Biden administration against companies like Google. The US Justice Department sued Alphabets Google on Tuesday, accusing the tech giant of abusing its dominance in digital advertising. And Ticketmaster.

The Department of Justice is taking aim at Live Nation, the parent company of Ticketmaster, saying the concert giant is just too powerful. They say The Justice Department under the Biden administration, for the last year, they've really been targeting the middlemen in the industry that take a cut out of all transaction fees.

And is Visa a middleman in the same way, would you say?

Yes.

Visa was actually created to be a middleman as a way to move money without cash or checks. It was started by Bank of America in the 1950s, originally as a credit card called Bankaméricard. And what it did was build a highway between bank accounts and businesses.

Bankaméricard. Think of it as money. Money when you're close to home. Money when you're away from home. Bankaméricard. It's money in a more versatile form.

In the '70s, Bankaméricard was spun off. That's why Bankaméricard is becoming Visa. Visa went global and connected more banks and businesses, partly because it helped process transactions really quickly through its financial highways.

I mean, today with the technology, it's immediate. In some ways, if you give cash to a cashier, that's still a millisecond Probably more immediate than a card. And part of Visa's technology is really being able to make that jump from a card to cash accepted by the business almost instantly instantaneously.

In exchange for making transactions fast and easy, Visa collects a fee. Every time you swipe your Visa at a store, a small amount of what you pay is taken and split up among a few different parties. Visa usually gets the largest cut.

You swipe your debit card, and then the businesses will pay the banks, the card networks, any other players that are involved in making sure that that transaction goes through.

How big of a burden is that fee to businesses?

It's a huge burden because all of those swipe fees They add up really quickly. When you're talking to particularly small business owners, very often these types of swipe fees are, if not their highest operating expense, it's their second highest operating expense. Now, on the flip side of that argument, I do think it's important to point out that these card networks, they do offer a lot of services to the businesses. They're allowing the businesses to accept more types of transactions. They also monitor things in their networks like fraud, returns, which are both issues that would take up a lot of time for business owners to deal with on their own. They are adding value to the commerce system at 1,000%. There is no doubt about that. But it is a burden on business owners.

Do these business owners have to go through Visa? Do they have other options?

They do have other options. There's Visa, and there's also MasterCard. There's Discover. There are other card networks that are at play here. But at the end of the day, Visa is the most dominant, and how it's become the most dominant is a big part of this lawsuit.

According to the DOJ, Visa started engaging in anticompetitive practices after a law was passed in 2010. That law was meant to give business owners greater choice as to which network they process transactions through, so that even if their customers paid with Visa cards, the businesses could use alternate networks like MasterCard and Discover to save on fees. After the law was passed, The Justice Department says Visa saw a decline in debit transactions going through its network. The company was losing business, so Visa made some changes.

The way that Visa presented it to business owners is that we will give you a discount if you route the majority, if not all, of your debit transactions onto the Visa network. But the Justice Department says that this was not a discount. This was a punitive a fine. It was a punishment on businesses. It was a punishment that if businesses did not route the majority of their debit transactions on the Visa network, then they would face these fines.

According to the lawsuit, if a business decides to run even some of its debit transactions through other payment networks, Visa would raise its fee. Because Visa controls so many transactions, it's hard for businesses to avoid Visa altogether, which means that at the end of the day, it was cheaper to just stick with Visa to avoid higher fees. The DOJ argues that through this practice, Visa prevented businesses from going to competitors. But companies like MasterCard and Discover aren't Visa's only competitors. Over the last decade, tech companies have tried to gain a foothold in the payments industry. And according to the Justice Department, Visa has worked to shut them out, too. That's next. Visa has successfully maintained its position as the dominant payment network. But over the last decade or so, new technology companies have come up with payment methods that are less reliant on Visa's infrastructure. Services like Cash App.

That's money, that's Cash App.

Venmo. We have Venmo, the app that makes paying your friends back more glorious than ever. And Zelle. Zelle.

Look for it in your banking app.

As these apps and services become more popular, they're threatening Visa's dominance of the payment industry.

Even with Cash App and Venmo, both of those companies for the majority of their history has been just sending money to friends, right? Both of those companies are now trying to incorporate a strategy where you can use their apps to pay at small businesses. There is a lot of innovation happening, and of course, Visa is seeing all of those as potential existential threats.

And according to the DOJ, Visa has been trying to get these companies off its turf. One big company that the Justice Department alleges Visa targeted is Apple. The lawsuit zooms in on a deal between Apple and Visa that the DOJ claims is anticompetitive.

What's so interesting about Apple's innovation in the payment space is really around the Apple wallet. The Apple wallet is one of the biggest existential threats to Visa today. And the reason is you have cards in your wallet. Now, those can be stored in the Apple wallet. What's stopping Apple from developing their their own network, their own rails, where them, an Apple iPhone user, wouldn't need to put in their card information to pay for things. What is stopping Apple?

What is stopping Apple?

In this lawsuit, it talks about Visa's relationship with Apple, and it says that Visa struck a deal with Apple, which said that Apple cannot deploy payment technology that would compete with Visa or prod any of their consumers away from Visa cards. That's huge. Visa is saying, The only way we're going to let you access to the Visa card so that you can store it in your Apple digital The Wallet is if you promise that you do not create technology that will compete with our card. In return, according to this lawsuit, Visa said that, We will share our profits with you if you promise that you not innovate in this space.

Like stay away from our lane and we can be friends.

Yes.

Is what the lawsuit alleges.

Exactly. To add on that, there was a former Visa CFO that basically summarized the strategy with Apple with a quote, Everybody is a friend and partner. Nobody is a competitor.

The Justice Department says that Visa has used a similar strategy with emerging competitors, too, allegedly partnering with them to stifle innovation. One example prosecutors point to is a deal Visa made with Square. That's the company that makes those white devices that lets people swipe credit cards on their phones. It's also the company behind Cash App.

A little over 10 years ago, Square was in the early days of trying to build out Cash App. Visa was looking at this product, and they were, according to this lawsuit, Visa was concerned that in building out Cash App, the company would go on to build its own network and rails for money to pass through.

Meanwhile, Square was looking for a way to pay lower fees when users linked their debit cards to Cash App to move money.

Visa agreed to a lower fee, but then they also said that they had the right to exit from this agreement if they found that Square was creating a product that competed with them. After signing this contract with Square in 2014, according to the lawsuit, there was a Visa executive that said, We've got Square on a short leash.

According to the DOJ, this contract has prevented Square from developing its own network that could compete with Visa.

This deal was problematic because it was another example of Visa strangling the competition, basically using their position question of power to compel smaller players to not innovate.

Visa said the lawsuit, quote, ignores the reality that Visa is just one of many competitors in a debit space that is growing with entrants who are thriving. If the Justice Department wins this case, what effect will it have on consumers, if any?

If the Justice Department gets what it wants from Visa, there will be more competition in the CART Network. Industry. No matter how you slice it, dice it, that just means that those savings in some way, shape, or form will go down to consumers. Because merchants have said that because these fees are so high, they've had to increase the prices of their goods and services on top of inflation from the last couple of years. The idea is if there is more competition, it lowers fees that the businesses have to pay, then the businesses will pass on those discounts to the consumers. That's the idealistic, optimistic view of this anyway.

In a statement, a lawyer for Visa said, We are proud of the payments network we've built, the innovation we advance, and the economic opportunity we enable. What does the future of Visa look like? A lot of time with lawyers.

Yeah. This is going to be a prolonged battle. This is not the type of lawsuit that's likely going to be settled in a couple of months, in a year. This is going to be years of legal battles and legal fees that Visa will have to face.

That's all for today, Monday, September 30th. The Journal is a coproduction of Spotify and The Wall Street Journal. Additional reporting in this episode by Dave Michiels. Thanks for listening. See you tomorrow.