Eager to be seen as taking action against the high prices it has helped bring on, the Biden-Harris administration is now targeting Visa’s debit card business.
Visa, of course, provides credit and debit card networks that make it more convenient for consumers to pay at the register, the gas pump, or the online checkout counter. It has little impact on the (sometimes horrific) prices consumers are paying. But the Justice Department's lawsuit against Visa, filed in late September, seeks to cast the company as a cause of the high prices consumers face because of the fees that Visa charges to various participants in its network, such as stores and banks.
I don’t have any financial interests in defending this particular company. However, as a free market public policy wonk, former economics professor, and pastor, I have every political and moral interest in calling out this administration for trying to scapegoat the private sector to cover its personal political shortcomings. Using the regulatory state as a way of securing political points might help an election talking point, but it also produces government-sanctioned winners and losers to influence voters.
To its credit, Justice's lawsuit admits that Visa's fees make up a "small fraction" of each consumer purchase. Merchant fees make up about 44 cents of an average $60 purchase in the Visa system -- which works out to less than 1%. Visa in turn gets only a fraction of that. Much of the rest goes to card issuers, which use the money to subsidize their consumer banking operations, as well as to other network participants. Nevertheless, the Justice Department contends those fees — and Visa's supposed dominance in the consumer-payments marketplace — constitute an oppressive burden for consumers that must be eliminated.
The new DOJ case appears designed to generate headlines more than action, accusing Visa of being a dominant monopoly even as it faces massive new threats. The DOJ's move isn't just an election-year political stunt, although it's definitely that. It's also a classic case of a government regulatory action being taken long after the market has already begun correcting whatever problems might have once existed. In essence, DOJ accuses Visa of monopolizing the payments market through deals with its would-be rivals that effectively pay them off for not competing with Visa head-on. But the truth is consumers have never had so many different ways of paying for products. And not all of them are acting like they are Visa's friend. That suggests competition is thriving.
For starters, Visa competes with the likes of MasterCard and American Express, as it always has. Second, thanks to the rise of digital platforms, consumers now can also choose apps such as Venmo or Block (formerly Square) to make a huge array of transactions. Third, the giant smartphone makers, Apple and Google, have added their own digital wallet app to these offerings. That allows consumers to connect their existing cards to their phones, or even connect their phones straight to their bank accounts in some cases.
In other words, new entrants in the consumer payments space are clamoring for spots in a marketplace that -- far from being dominated by one player -- is practically overrun with competitors. That's actually an achievement to be celebrated, particularly given how hard it is to create these networks. Plus, let's remember that Visa now is facing direct competition from Apple, the world's largest company by market capitalization with a $3.5 trillion valuation, as well as Google, whose parent Alphabet is the fourth largest at $2 trillion. Visa, which comes in somewhere around 15th, is supposed to be the big bad wolf?
Not even the Biden-Harris administration actually believes this fairy tale. In a paper published by the federal Consumer Financial Protection Bureau late last year, its Office of Competition pointed out that the tech companies are the ones with the real long-term power in the payments market. The evolution of payments technology means that Apple and Google "are playing a powerful role in determining consumers' payment options," the report stated. "[T]hese two companies, and the business models and choices they employ, will have profound impacts on the competitiveness of the payments market and the future of open banking."
The Justice Department lawsuit, by contrast, attempts to depict Apple as a helpless victim, being tied to a railroad track by evil Visa. But dig into the lawsuit a bit, and it sounds like Visa is the one that is scared for its life. Internally, Visa has long viewed Apple Pay as "an existential threat," according to the Justice Department lawsuit.
That led Visa to enter into a set of agreements with Apple starting in 2012 that -- according to DOJ -- were designed to reduce the danger of Apple’s competition in the consumer payments market, according to the suit. Those agreements have netted Apple as well as other potential rivals hundreds of millions of dollars each year from Visa. But by 2022, "Visa worried that its relationship with Apple was at a `tipping point,'" according to the lawsuit, "as Apple created new inroads into the traditional debit and credit ecosystems." Those inroads likely included Apple's high-profile partnership with investment bank Goldman Sachs in 2019 to operate Apple's own new credit card program. It has around 12 million users currently. Goldman recently decided to step back from the partnership with Apple after losing hundreds of millions. JPMorgan Chase reportedly has emerged as the next contender for the job. Notably, Apple's credit card partnership has also included MasterCard, Visa's archrival in the traditional card space.
It seems impossible that Visa is really the dominant market bully that the Justice Department imagines, but for an administration that’s so intent on blaming everyone else for inflation — from landlords for housing costs to grocery stores for food bills — I guess anything goes.
