DOJ Sues Visa For Alleged US Debit Monopoly
a16z-Backed Moov Lays Off About 30% Of Staff, Is Lull In Synapse Bankruptcy The Calm Before The Storm?
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Department of Justice Sues Visa For Alleged US Debit Monopoly
The US Department of Justice filed a 71-page civil complaint last week that accuses Visa of maintaining an illegal monopoly of the debit network market in the United States, in violation of Sections 1 and 2 of the Sherman Antitrust Act.
US Attorney General Merrick Garland commented in the press release announcing the suit (emphasis added), “We allege that Visa has unlawfully amassed the power to extract fees that far exceed what it could charge in a competitive market. Merchants and banks pass along those costs to consumers, either by raising prices or reducing quality or service. As a result, Visa’s unlawful conduct affects not just the price of one thing — but the price of nearly everything.”
What’s In The Suit?
The Department of Justice’s antitrust suit reportedly stems from the agency’s 2020 lawsuit that ultimately scuttled Visa’s attempt to acquire open banking infrastructure company Plaid for $5.3 billion.
The DOJ’s new suit against Visa shouldn’t be entirely surprising, given that, at the time it sought to block the Plaid acquisition — when the agency was led by Trump-appointee Bill Barr — it described Visa as “a monopolist in online debit services” that sought to preempt the potential competitive threat Plaid posed by acquiring the company.
The complaint describes Visa has having the “largest, most powerful” debit network in the US, which has helped it drive nearly $19 billion in operating income and an operating margin of 64% in 2022. Visa’s operating margin in North America is even higher, at 83% in 2022.
The DOJ outlines two key business practices it alleges Visa used to maintain its illegal monopoly of debit card networks: leveraging contracts to prevent “PIN” debit networks from gaining meaningful scale and using its market power to “squash” innovative potential competitors, often through incentive payments or partnership strategies.
While Visa and Mastercard are the best-known payment networks, a host of so-called PIN debit networks also compete for transaction volume. Networks like ACCEL, NYCE, STAR, and SHAZAM, which began as regional ATM networks, also process debit transactions. Visa also owns its own debit network, Interlink.
Despite often being referred to as “PIN” networks, owing to their origins in the ATM space, many can process transactions on a PIN-less basis, meaning they can support use cases where a customer doesn’t want to or cannot enter a PIN at the point of sale, such as in ecommerce transactions.
The Durbin amendment, which requires debit cards to support at least two unaffiliated networks (eg Visa and a non-Visa-owned PIN network) went into effect in 2012. This provision of Regulation II was further clarified in 2023, extending the unaffiliated network requirement to card-not-present transactions.
Yet, despite debit cards supporting non-Visa networks, which often can be less expensive on a per transaction basis, Visa continues to process the lion’s share of debit volume in the US.
The DOJ argues Visa has leveraged pricing structure, incentive payments, and penalties in how it has designed its contracts and routing agreements with merchants, payment processors, and issuing banks to unfairly maintain an illegal monopoly.
The result has been, even where potentially less expensive alternative processing options exist, that Visa enforces defacto exclusivity, the complaint alleges.
The complaint uses a hypothetical to illustrate how such tactics could work in practice:
Consider a hypothetical fast-food restaurant that has a Visa routing commitment with a cliff pricing structure. During a typical day, the restaurant has one hundred customers who present Visa-branded debit cards, all with the same back-of-card network. Fifty of those customers order online in card-not-present transactions—these transactions may be contestable by the back-of-card network. The other fifty customers present Visa-branded debit cards in person. Their cards are not enabled by the issuer for card-present PINless transactions on the back-of-card network and the customers do not enter a PIN when prompted to do so at the payment terminal. These fifty transactions from customers presenting their cards in the restaurant are non-contestable.
Under the terms of its Visa routing agreement, the merchant can avoid Visa’s high rack rates on the fifty non-contestable transactions, but only if it routes all one hundred transactions to Visa. If Visa’s rack rate for these transactions is $0.50 per transaction and its rate for all one hundred transactions is $0.25 per transaction, then the merchant would either pay $0.50 times 50 non-contestable transactions (totaling $25 plus any PIN network fees paid on the 50 contested transactions) or $0.25 times 100 transactions (totaling $25). This example illustrates how a smaller PIN network could only compete for the fifty contestable transactions if it agreed to route the transactions for free, which compensates the merchant for the penalties incurred on the non-contestable transactions.
Visa “Squashed” Potential Competition From Innovative “Fintech Debit Networks”
The DOJ also alleges that Visa has preempted threats from what the complaint calls “fintech debit networks,” including those that facilitate account-to-account payments that bypass Visa’s card rails.
Visa sought to blunt these threats through partnerships, penalty fees, and incentive payments that would discourage other firms from competing with Visa directly.
According to the complaint (emphasis added), “Visa’s philosophy towards preserving its monopoly from attacks by new competitors can be boiled down to the words of its former CFO: ‘[E]verybody is a friend and partner. Nobody is a competitor.’”
The potential risk from “fintech debit networks” has grown as real-time payment networks, like FedNow and The Clearing House’s RTP, have become more prevalent, solving the latency challenge and corresponding risks of using ACH for account-to-account payments.
As with its relationships with merchants and payment processors to encourage them to route transactions through Visa networks rather than PIN debit networks, Visa deployed a carrot-and-stick approach to managing risks from potential competitors, the complaint alleges.
Visa would threaten to charge penalty fees or higher “rack rate” processing costs to staged digital wallet operators, like Square’s Cash App, if they didn’t reach agreements with Visa, the DOJ claims.
On the flip, Visa would give lucrative incentive payments to big tech players like Apple and Google — so long as they didn’t develop or deploy payment functionality with the aim of competing with Visa, the complaint says.
What’s The Department Of Justice Seeking?
The Department of Justice is seeking recognition that Visa has illegally monopolized the market for general purpose debit network services and general purpose card-not-present debit services in the US, in violation of the Sherman Antitrust Act § 2; that Visa struck unlawful contracts not to compete, in violation of the Sherman Antitrust Act § 1; and that Visa entered into unlawful agreements to restrain trade, in violation of the Sherman Antitrust Act § 1.
The suit asks that court to “[e]nter such relief as needed to cure the anticompetitive harm from all of Visa’s unlawful actions,” by enjoining Visa from engaging in anticompetitive practices, including but not limited to:
bundling credit services or credit incentives with debit network services or debit volume;
imposing pricing or incentive structures, such as cliff pricing, that discourage or eliminate competition from rivals, potential rivals, or customers;
referencing rivals for Visa debit transactions, implicitly or explicitly, in Visa’s contracts;
imposing fees on debit transactions routed over non-Visa networks;
limiting, by contract or other means, the number of back-of-card networks on Visa-branded cards;
agreeing, implicitly or explicitly, not to compete;
imposing contractual limitations on the use of payment methods and payment rails (e.g., ACH, RTP, fintech debit, or alternative debit networks) that may compete with general purpose card-not-present debit network services or general purpose debit network services; and
imposing contractual limitations on the ability of customers to offer their own payment networks or methods, or adopt new technologies that may disintermediate Visa;
The Department of Justice’s antitrust case is the latest in a flurry of recent activity over the hot-button issue of payment processing costs, in general, and a continued focus on interchange rates, which are set by the card networks, in particular.
In addition to the clarification of Reg II, which extended the debit routing requirement to card-not-present transactions in 2023, the Fed has proposed lowering the interchange cap for covered debit transactions for the first time since the Durbin amendment went into effect, the proposed settlement in the Visa/Mastercard merchant class action was dismissed by the judge in the case, and the Credit Card Competition Act has bipartisan support — including being cosponsored by the Republican candidate for Vice President, JD Vance.
Still, if nothing else, it should be clear that legislative and regulatory attempts to reshape the payments market often don’t have the intended result — but do frequently bring about unintended consequences.
Whatever the outcome of various legislative, legal, and regulatory challenges to the card networks’ dominance, history suggests that the scope of any impact is unlikely to be fully seen and understood for quite some time.
Lull In Synapse Bankruptcy May Be Calm Before The Storm
Last Thursday saw the Chapter 11 Trustee in the Synapse bankruptcy, former FDIC Chair Jelena McWilliams, file her biweekly status report with the court, followed by a status hearing on Friday. Evolve Bank & Trust and Lineage also filed brief status updates with the court.
Little progress was apparent since the last update, however. No additional “DDA funds” have been disbursed since in the two weeks since the last update. Evolve continues to hold approximately $520,000, and Lineage holds approximately $55,000 of DDA funds.
Communication with relevant fintech programs to confirm balance details and payment instructions remains the blocker in distributing these funds.
Evolve has managed to get in touch with programs Donut, Grabr, and Homebase, but has not yet received any response from Namebase, Trim, Unest, or SeedFi.
The remaining approximately $55,000 of DDA funds Lineage holds are owed to fintech programs themselves, rather than end users.
AMG National Trust and Lineage have disbursed the bulk of the funds they held, with about $744,000 and $6 million remaining, respectively. American Bank still holds about $43,000, of which it has been unable to identify the proper owner.
Evolve has yet to distribute any of the approximately $47 million in FBO funds it holds.
According to the Chapter 11 Trustee, the estimate shortfall remains unchanged, at between $65 million and $96 million.
Lineage’s status update includes few new details, beyond emphasizing that the bank has already distributed the bulk of funds it held and that it will “continue working to restore the remaining Synapse-linked funds held at Lineage to their rightful owners as soon as possible.”
According to Evolve’s status update, it continues to work with its third-party consultant, Ankura, on reconciliation efforts, which, it says, remain on track to be completed by October 18th.
Evolve is also “in the process” of engaging a third-party administrator to help facilitate the disbursement of funds once reconciliation is complete. The third-party administrator will be responsible for “validating end users’ identity and account information so funds are distributed as efficiently and accurately as possible,” according to the bank’s status update.
In addition to the approximately $46 million in FBO funds it holds, Evolve’s filing also notes that the bank (emphasis added) “holds approximately $35.3 million in reserve funds that it will distribute to end users if the reconciliation determines that such distribution is appropriate.”
The relative uneventfulness of recent filings in the bankruptcy case may be a temporary reprieve.
The elephant in the room, a gap of as much as $96 million between the total amount of customer funds held by Synapse’s partner banks vs. what end users are owed, has received scant attention in recent updates to the court.
Synapse cofounder and former CEO Sankaet Pathak has previously alleged that, by his calculations, the gap is around $92 million, which he blames primarily on charges being debited from end user funds that should not have been and “discrepancies and overdebits” as part of the process of business banking startup Mercury migrating from Synapse to Evolve systems.
Yotta, the largest fintech program impacted by Synapse’s collapse, has also leveled accusations against Evolve in a separate lawsuit of “brutal theft” and “grotesque misconduct,” including that the bank “utterly failed in its most basic duty to its customers, misappropriating and/or misplacing tens of millions of dollars in customer funds.”
With Evolve expecting to complete its reconciliation efforts in just under three weeks, it would seem that continuing to avoid the question of the gap in funds — How much is the shortfall? What caused it? And, perhaps most importantly, who’s stuck holding the bag? — won’t be possible for much longer.
It’s unclear if Synapse’s current case in bankruptcy court is the most logical and appropriate venue to address the gap in end user funds and who is liable for the shortfall.
For now, McWilliams, the Trustee, has recommended the bankruptcy case remain in Chapter 11 and not yet convert to a Chapter 7 liquidation.
a16z-Backed Moov Lays Off About 30% Of Staff, Sources Say
Payments infrastructure startup Moov has laid off about 50 employees, or around 30% of its staff, Fintech Business Weekly exclusively learned last week.
Moov offers merchant acquiring, card issuing, payment processing, digital wallets, and program management and boasts direct connections to the card networks, The Clearing House, and the Fed.
Moov has raised approximately $77.5 million from top-tier investors like a16z, Bain Capital Ventures, and Commerce Ventures across three funding rounds.
According to sources with knowledge of the matter, about 50 employees, or about 30% of the company, was impacted by the layoffs. Product, operations, and engineering were hardest hit by the cuts, the sources said.
The decision to reduce the company’s burn rate and extend its runway by cutting headcount was driven at least in part by shrinking revenue, disagreements with a top client, the Republican National Committee, and challenges with a key bank partner, Pathward, people familiar with the situation said.
Representatives for Moov didn’t respond to a request for comment on the matter.
Fintech “Summertime Sadness”?
FT Partners released its fintech funding tracker earlier this month, showing announced deal count and funding volume dipping from $4.8 billion across 305 deals in July to $3.1 billion over 241 deals in August.
Still, the apparent slowdown may be more mirage than reality, as many companies hold off on announcing key news during the peak summer vacation weeks in August.
Other Good Reads & Listens
Reciprocal Deposits and the Banking Turmoil of 2023 (Federal Reserve Bank of Cleveland)
The Risks of Generative AI Agents to Financial Services (Todd Phillips)
Three Big Questions About the Future of AI in Financial Services (Fintech Takes)
CFPB Report Highlights Challenges Facing Servicemembers and Veterans with Student Loans (Consumer Protection Financial Bureau)
Plaid’s Former Billionaire CEO Has A Bold Plan To Revive Its Growth (Forbes)
Listen: Interview with Valor Capital’s Michael Nicklas (Fintech Business Weekly)
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