Senate Majority Whip Dick Durbin was riled up when he leaned into his microphone to speak last month at an antitrust subcommittee hearing. The source of his consternation? The dominance of Visa and Mastercard.
Durbin, a Democrat, recounted how he had walked into that same Senate chamber 15 years ago when the late Sen. Arlen Specter, who once chaired the Judiciary Committee, schooled him in interchange, or 'swipe,' fees imposed by the credit card networks.
Now, as the Judiciary chairman in a newly Democrat-controlled Senate, he still has Visa and Mastercard in his sights, and still believes their fees are out of control.
"Visa and Mastercard still are so dominant in the payments market that merchants couldn't stay in business without using their cards," he said during the March 11 subcommittee hearing, noting U.S. retailers and merchants paid a "staggering" $62.5 billion in swipe fees last year. "All those costs are ultimately borne by consumers across America."
Such attacks on Visa, the dominant card network company, and no. 2 Mastercard, have persisted for decades on Capitol Hill, in the courts and at the U.S. Department of Justice (DOJ). Now, they've flared up again — with Democrats in control of Congress and the White House this year — for the first time since 2011. Durbin's aggressive stance, a DOJ investigation into Visa's debit card business, and merchant litigation against the two companies amounts to the biggest threat to Visa and Mastercard's businesses in a decade, as detractors take aim at debit and credit fees. The confrontations could mean billions of dollars in legal damages, and potentially billions more in lost revenue, just as the two 20th-century payments companies face 21st-century fintech and crypto competition.
"Visa and Mastercard still are so dominant in the payments market that merchants couldn't stay in business without using their cards."
Dick Durbin, D-IL
From Subcommittee on Competition Policy, Antitrust, and Consumer Rights, March 11, 2021
The latest irritant for Durbin — and his merchant organization allies including the National Retail Federation (NRF) and Merchants Payments Coalition (MPC) — was a plan by Visa and Mastercard to increase credit card swipe fees last month. Durbin called it a blow to American businesses and consumers recovering from COVID-19's impact.
While Durbin won curbs on debit fees with a 2010 amendment to the Wall Street Reform and Consumer Protection Act, credit card fees remain unchecked. The credit interchange fees average about 2.25% per transaction. While bank issuers of the cards take the lion's share of the fee, the card networks set the fee and take a slice too. Both credit and debit fees are anathema to the opponents.
"Where is the policing authority to stop this duopoly from doing this to every merchant retailer in America," he said at the hearing. "I don't see it."
Within days San Francisco-based Visa and Purchase, New York-based Mastercard caved, saying they wouldn't pursue the broad-based credit card fee increases. "We will not make any future rate changes in the U.S. for another year while the economy recovers," Visa said in a March 16 statement.
It was a repeat of back-pedaling they did last year in holding off a previously scheduled fee increase because of the pandemic. Durbin praised their latest moves, but some merchant groups remain outraged.
"Credit card swipe fees paid by U.S. merchants are among the highest in the world," the MPC said in a statement the same day. "Rather than just delaying an increase, they need to lower these fees ... Since they haven't shown any sign of doing that voluntarily, it's time for Congress and enforcement agencies to take action."
Three days after Visa's statement about not raising fees, it disclosed in a March regulatory filing that the Justice Department said it planned to open an investigation into its U.S. debit card practices. In the filing, Visa said its debit business adhered to the law and is cooperating with the DOJ.
Visa has been mum on the probe since then. "We are not able to comment on any ongoing investigations or litigation underway, nor would we speculate on the topics," said Visa spokesman Andy Gerit.
The antitrust division investigation turns on whether Visa incented banks to limit merchants' ability to route transactions over less expensive networks, The Wall Street Journal reported last month, citing sources familiar with the probe.
It's similar to a Federal Trade Commission inquiry that has been underway for more than a year, delving into whether Visa illegally "inhibited merchant choice in the selection of debit payments networks," according to Visa's annual filing with the SEC last year. It focuses whether transactions are illicitly routed away from alternative networks such as Pulse, NYCE and Star.
Routing has become a bigger concern with the explosion of e-commerce prompted by the COVID-19 pandemic. "It's really renewed the interest and the need to do something," said Hannah Walker, vice president of political affairs for FMI - The Food Industry Association (FMI), which represents grocery wholesalers and manufacturers. Grocers' higher pandemic costs and slim 2% profit margins underscore the urgency, she said.
"Merchants are always going to complain about the fees they're charged and every now and then regulators are going to listen."
Durbin, along with U.S. Rep. Peter Welch, D-VT, also asked the Federal Reserve to look into potential anti-competitive actions by Visa in the debit card market last year.
"Merchants are always going to complain about the fees they're charged and every now and then regulators are going to listen," said Brett Horn, a Morningstar analyst who covers the credit card network companies.
In a striking contrast to the grocers, Visa's profit margins have been about 50% over the past decade; Mastercard's has been 35% to 40%, Horn estimates.
FMI and other trade organizations aim to ensure the landmark 2010 'Durbin Amendment' is enforced. It's supposed to cap debit fees at .05% of each transaction, plus 21 cents, and another cent if the bank issuer offers certain fraud protections. It also requires access to competing networks during a transaction. The cap only applies to banks with more than $10 billion in assets.
Still, debit card transactions rose during the pandemic as consumers eschewed credit amid the uncertain economic outlook. And Visa's business benefited.
"Debit has continued to grow at a very healthy clip," Visa Chief Financial Officer Vasant Prabhu said during a March 10 Wolfe Research webcast, describing trends in the first three months of the year. "It was up 22%. So, debit remains sort of the way in which people are adopting more digital payments ... but credit is recovering nicely."
Regarding the then proposed interchange fee increase, Prabhu called them "adjustments" to reflect the current world situation and to combat fraud. He also noted they hadn't been raised in "a very long time."
Plaid acquisition called off
Even before President Donald Trump left office in January, DOJ's antitrust division sued Visa to stop its $5.3 billion acquisition of Plaid, a fintech company contemplating an electronic debit payment network to rival Visa's.
Plaid isn't the only new competitor. Fintech companies from Square to PayPal are innovating on this front, and rising crypto currency enterprises, with their blockchain technology, could remake the payments landscape entirely.
Nonetheless, in its civil lawsuit, the Justice Department said Visa violated antitrust laws in seeking to buy Plaid in 2019. "By acquiring Plaid, Visa would eliminate a nascent competitive threat that would likely result in substantial savings and more innovative online debit services for merchants and consumers," the November lawsuit said.
"Visa is a monopolist in online debit transactions, extracting billions of dollars in fees annually from merchants and consumers," the agency alleged, noting that Visa controls 70% of the online debit transaction market, and earned about $4 billion from it in 2019. That's about a fifth of the $22 billion in annual net revenue reported last year.
The DOJ lawsuit, filed in U.S. District Court for Northern California, included a sketch drawn by one of Visa's top executives to illustrate the company's apprehension about Plaid. The illustration showed an island volcano with the phrases "bank connections" and "account validation" at the top, above sea level, and other labels like "identity matching" and "credit decisioning," below the surface in alarming red ink.
Plaid's current capabilities are "the tip," and underwater is "a massive opportunity – one that threatens Visa," he told his colleagues, according to the lawsuit.
Visa called the lawsuit "misguided" and argued in its court response last year that DOJ's allegations revolved around Plaid as a "potential" competitor, and not the reality of the situation. Visa also noted Mastercard, American Express and Discover Financial Services as rivals.
"In reality, the significant, tangible, near-term benefits that will be derived from the transaction simply dwarf the highly remote and speculative risk of anticompetitive effects that Plaintiff posits," Visa said in its Nov. 27 court response.
Among the benefits, Visa noted plans to change Plaid's interface to provide its customers with new services and to accelerate Plaid's migration to international markets. Nonetheless, Visa and Plaid dropped their merger plans in January, citing the "complex and protracted litigation" in a joint statement.
Long history of litigation
Battles over network fees reach even further back. "You have two dominant players who are always trying to find ways to restrain trade and impose improper fees on merchants," said New York antitrust lawyer Lloyd Constantine. "So, we're always suing them and regulators are always investigating and suing them."
Constantine, whose career history bridges the two companies' antitrust strife over three-plus decades, today is a founding partner at the boutique firm Constantine Cannon in New York. As assistant attorney general and antitrust chief for New York State in the 1980s, Constantine led one of the first successful antitrust actions against the two companies, when New York and other states sued Visa and Mastercard in 1989 to stop them from teaming up on a new debit venture called Entree. The companies dropped their plan the following year.
Visa got its start in 1958 when Bank of America launched it as part of a consumer credit card program, while a predecessor to Mastercard was created by a group of banks in 1966. They were spun off by bank owners more than a decade ago.
Their "duopoly" today results from a "conscious parallelism," whereby Visa and Mastercard simply follow each other's market moves, said Constantine. No smoke-filled rooms with signed agreements required, he said.
Constantine's firm is pursuing a multi-billion-dollar lawsuit against the two companies on behalf of some 60 of the biggest U.S. merchants and retailers, including Starbucks, Amazon, Costco, and the parent company of AMC theaters. That case, scheduled to go to trial next year, targets Visa and Mastercard's credit businesses more than their debit businesses, Constantine said. It argues that the two companies prevent merchants from accessing more cost effective payment channels. For instance, the two companies have stifled bank efforts to connect more directly with merchants, Constantine said in describing the lawsuit's allegations. In other parts of the world, the networks are cheaper, faster and safer, he argues.
That lawsuit, playing in U.S. District Court in Eastern New York, grew out of litigation by a group of smaller merchants still struggling to finalize a $5.5 billion settlement. The big peers opted out and sued on their own because a proposed settlement in the case didn't provide enough compensation, and didn't sufficiently rein in anticompetitive behavior, Constantine said.
In its most recent annual filing with the SEC, Visa describes the potential impact: "Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could, in the future, incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company's financial position, results of operations or cash flows."
Despite the ongoing pressure, shares of Visa and Mastercard have risen this year in tandem with the Standard & Poor's 500 Index. Horn said he expects the companies, with their $400 billion to $500 billion market capitalizations, to simply keep absorbing whatever legal damages and fines come down the pike.
"It's a real cost for them, but I don't think it's a situation that weakens their competitive position in a meaningful way," he said.
Fed's role in debit fees
Merchants won a $3.4 billion settlement against the card networks in 2003 against Visa and Mastercard over their debit fees that provided court relief of $87 billion in debit savings for merchants over 10 years, Constantine said. Along with the 2010 Dubin Amendment, it reined in debit fees, despite one shortcoming, according to people in his camp. Under the Durbin law, the Federal Reserve is required to determine a cost basis for the debit cap, based on expenses to process the transactions. That calculation hasn't changed since 2011.
"If the amendment had been properly implemented by the Federal Reserve those charges would have been even lower than they are now," said Constantine, who believes the figure should be closer to 13 cents. "This is an opportunity for the Fed to revisit what we consider to be an erroneous determination."
"[The Durbin Amendment] produced unintended consequences for some merchants in terms of raising costs."
Managing Director, Alix Partners
The Fed's biennial update on the cost is due any day now, based on past practice. If the Fed finally lowers the cost basis, it will be another knock on the card network companies. Fed spokeswoman Susan Stawick declined to comment on when the latest report will be published.
Alix Partners Managing Director Mark Flamme points to a 2015 Richmond Federal Reserve Bank study as evidence that merchants may not actually pass fee savings to consumers. "Their argument rings hollow," Flamme said of those calling for reduced fees. The study also notes that the Durbin Amendment "produced unintended consequences for some merchants in terms of raising costs."
'Tectonic shift' in Congress
Still, there has been a "tectonic shift" in awareness of these issues with more openness in Congress to the notion of addressing structural problems in the card network industry, said a Durbin aide who asked not to be named. Now, more people are paying attention to these dominant players in this "critical market," with the "same sort of competition concerns for credit as for debit," he said.
Credit swipe fees soared in recent years, more than doubling to $67.6 billion in 2019 for Visa and MasterCard, from $25.6 billion a year in 2009, said Craig Shearman, a spokesman for the NRF and MPC, citing statistics from the industry research firm Nilson Report.
On $3.6 trillion in U.S. credit card purchases last year, Visa controls 53.7% of the market, Mastercard has a 23.2% share, American Express has a 19.2% share, and Discover 4%, according to Nilson Report.
An AmEx spokeswoman declined to comment for this story. Mastercard and Discover didn't respond to a request for comment.
The Durbin aide said he wasn't aware of any current legislative proposals spearheading the credit issues, and noted any bill on the issue could still be a "tough legislative lift" in an evenly divided Senate.
Nonetheless, the merchant and retail interest groups are ready with ideas for reform. Creating an independent regulatory body to oversee fee-setting is one proposal, said Leon Buck, NRF's vice president for government relations, banking and financial services. "We need a body that's sole purpose is to regulate this activity," he said.
Focus on debit fee enforcement
Not even the merchant and retail groups are plugging for new legislation at the moment. NRF's Buck and FMI's Walker both said enforcing existing debit laws should be the priority. They seem cognizant that Durbin is preoccupied with President Biden's legislative priorities, namely providing pandemic relief and developing a plan to overhaul U.S. infrastructure.
Visa and Mastercard have found a way to chime in there too. This year, they formed a new advocacy group, along with payment processors, Payments Leadership Council. Its founding director, Raj Date, wouldn't comment on the regulatory and litigation challenges facing the industry, but he's broadcasting the council members' contributions to Biden's agenda, touting their role in the distribution of debit cards for pandemic relief programs and bolstering security for increased e-commerce.
The Electronic Transactions Association, which also includes Visa and Mastercard, declined to comment on those fee travails as well.
The new council's CEOs met with Treasury Department Deputy Secretary Wally Adeyemo this month and discussed broadband infrastructure for small businesses and financial services for the underbanked, among other things, according to Date and a Treasury Department statement.
"Our ambition would be to be a resource to policymakers and at the same time ... to have a point of view on big-ticket future issues," Date said.
If the federal investigation and litigation outcomes fall short of fee opponents' goals, Durbin and his anti-fee allies may yet make legislative proposals one of those issues.