We’re back with another installment of Payments Post, the blog where we recap the news stories that got the Glenbrook team talking in the past month. September and October brought another set of interesting headlines for those of us watching the future of payments in the US (and elsewhere), with the DOJ bringing a lawsuit against Visa that alleges the company operates an illegal monopoly in the debit card space. Does the argument have merit in our non-legal minds? And if so, what could the DOJ’s move mean for an evolving payments landscape?
Let’s start with the details of the suit. The DOJ takes issue with the fact that Visa now controls 60% of the debit card market. Visa has long led debit card market share in the US, but has recently gained share at the expense of smaller networks, a category which includes entities like Shazam and Pulse but not Mastercard, whose share of the debit space has remained relatively steady. However, the suit is as focused on this share gain relative to other debit networks as it is targeted at Visa’s efforts to keep net new entrants from competing in the payments space.
The DOJ specifically calls out Visa’s blocked acquisition of Plaid as indicative of its strategy to limit competition from “new entrants” that could threaten its control of the debit environment. In the eyes of the DOJ, the merger represented Visa’s goal to quash fintechs designing “disruptive options for online debit payments.” This pattern has persisted, the DOJ alleges, and allows Visa to remain a “middleman” that prevents tech players from establishing new connections between merchants, consumers, and their banks by offering a better or cheaper payment product.
We are not lawyers, but we do have some thoughts here, particularly on the second portion of the DOJ’s argument (that Visa is inappropriately limiting competition from fintechs). Namely, card networks do indeed recognize that there is a competitive threat from non-card payment rails in the consumer payments space. This has led to acquisitions, like Mastercard’s 2016 purchase of VocaLink, and (at least partially) new product lines, like push-to-card. It is up to the DOJ to determine whether or not these moves constitute a violation of anti-competitive practices. But it is also worth noting that payments are largely contextual, and their context determines the payment rail that is used.
In retail payments, cards offer clear advantages. Cards are widely used by consumers and accepted by merchants, card brands offer a high degree of trust for both parties to a transaction, and the nature of card transactions eliminates tedious back office tasks associated with cash. And, as has been discussed at length over the course of this year, fraud is an increasing concern for both merchants and consumers, particularly as related to app-based payments and (shudder!) checks. Meanwhile, we observe that fraud mitigation approaches in the card space are quite mature.
And yet, in spite of these advantages, the issue of cost remains a perennial concern for merchants. As consumers suffer from rising prices, transaction costs have naturally come into focus. So what are these fintech solutions that promise to lower costs to merchants and offer consumers (to borrow a word from the DOJ) a “better” payments experience? Ross McFerrin, Vice President of Enterprise Growth at Trustly, speaking with Nacha, acknowledges that pay-by-bank is nascent in the US, despite rising consumer interest and new potential use cases. Still, there are glimmers of hope for cost-averse merchants and inflation-weary consumers. Walmart, for example, announced earlier this month that the big box giant is expanding its Pay by Bank product to allow for instant payments, eliminating the “pending” transactions you might encounter with your debit card. They’re doing so in cooperation with Fiserv. And elsewhere, Lyft and Cash App are teaming up to allow riders to pay with their wallet instead of a card. Block has long envisioned Cash App as an alternative to cards, fostering a closed loop Square/Cash App ecosystem with limited success. And don’t forget PayPal, the original non-card payment method. Their PayPal Everywhere product which promises to let you pay, well, everywhere is powered by a debit card (albeit one issued by Mastercard).
What does this all mean? Again, we cannot give you a legal opinion. But cards have their advantages over competitors. And costs are a real concern, especially in our inflationary age. Both of these can be true, and more competition is always welcome. The DOJ is welcome to assess the playing field to ensure it remains level, but pay-by-bank alternatives will find it challenging to catch up to cards regardless of the outcome of their suit. Still, if this challenge results in real benefits for merchants and consumers, it is worthwhile.
