Discover Sues Visa, Alleging Illegal Anti-Competitive Tactics

Discover on Tuesday (Nov. 25) sued Visa, slamming the card brand with antitrust violation accusations. The court’s issue: Is Visa just an aggressive company or did it cross the line?

“In order to maintain its monopoly, Visa has undertaken a series of illegal actions that undermine competition – harming rival debit networks, merchants, acquirers, card issuers and consumers,” the federal filing said. Discover, through its Pulse Network unit, “seeks to enjoin Visa’s ongoing violations of antitrust laws, receive compensation for lost profits, and promote healthy competition for general purpose debit card network services in the United States.” (Click here to read the full text of the federal filing.)

One of the accusations is that Visa has pushed signature debit, despite the security advantages of PIN debit. “Visa dominates the provision of signature debit network services, maintaining a market position based on charging higher fees for its services and earning higher profits. Permitting the superior PIN debit to predominate in the marketplace would cost Visa a lot of money. Accordingly, Visa has a long history of making sure that does not happen, including undertaking illegal behavior to fend off competitive threats to its debit network services monopoly.”

Discover is building some of its case on antitrust rulings that have already gone against Visa. “Around the same time that Visa was illegally ensuring that signature debit would become predominant in the United States, Visa imposed a rule prohibiting any of its issuing financial institutions from also issuing signature debit cards on competitor networks such as Discover,” the lawsuit said. “The rule ensured that Visa would dominate the large signature debit marketplace that it had illegally created. The Department of Justice challenged that Visa rule and it was found to violate the antitrust laws by a federal district court in New York City and the 2nd Circuit. By 2004, the illegal practices that Visa had used to acquire its debit network monopoly had been struck down and eliminated. But by then it was too late. Over 70 percent of debit cards in the United States bore the Visa brand and nothing in the resolution of the prior antitrust cases changed that. Visa’s debit network pricing reflected its resulting dominant position.”

Many of the specifics hark back to the kind of key antitrust questions that federal courts often struggle with. What should the antitrust limits be? Isn’t a company supposed to try and negotiate favorable deals? What does a market dominant company have to do the cross the anticompetitive line? It’s arguably the oldest capitalist question there is.

Consider this accusation of deals Visa negotiated. “Beginning in the early 2000s, Visa negotiated agreements with numerous Visa debit card issuing financial institutions that resulted in Visa’s affiliated PIN debit network, Interlink, obtaining sole placement as a PIN debit network on a substantial number of Visa signature debit cards. While Visa had no interest in having PIN debit replace signature debit, by gaining control of a greater share of PIN debit transactions, Visa sought to limit competition for signature debit and ensure that debit network pricing remained high. In particular, Visa used its agreements with debit card issuers to neutralize merchant and acquirer attempts to avoid Visa’s high signature debit network pricing by switching to PIN debit, the superior product. If both the signature debit and PIN debit options on a debit card were controlled by Visa, then merchants and acquirers would have no choice but to send their debit transactions to a Visa-controlled network. As a result of these agreements, Visa’s share of debit network transactions grew further.”

Then there’s Durbin. Discover said that Visa’s aggressive tactics again violated the rules, going beyond mere competition. “Visa could have confronted this new challenge (Durbin) with competition on the merits. Even though issuers of Visa signature debit cards were now effectively required to place at least one non-Visa PIN network option on their cards, Visa could have tried on the merits to convince those issuers to include Visa’s PIN network as well. In addition, even though merchants and acquirers now had an option to process debit card transactions on a non-Visa network, Visa remained free to compete on price, quality, and service to convince those merchants and acquirers to route through Visa on the merits. But Visa chose not to compete on the merits. Instead, Visa chose to tilt the competitive playing field to its advantage. Specifically, Visa adopted a carefully integrated, illegal strategy to preserve and enhance its debit network services monopoly,” the filing said. “Instead of trying on the merits to convince Visa’s signature debit card issuers to include Visa’s PIN network as one of the options on their cards, Visa imposed a new mandate on its issuing financial institutions called the PIN-Authenticated Visa Debit mandate (or “PAVD mandate”) that requires issuers of Visa signature debit cards to include Visa’s PIN authentication functionality on their cards. So while every other PIN debit network must compete to have issuers place their PIN network on Visa signature debit cards, Visa has avoided such competition by mandating that a Visa PIN option be included on every Visa signature debit card. Visa is enforcing this mandate through threats, fines, and penalties. The PAVD mandate injures card issuers and cardholders and, by itself and together with other illegal Visa actions, serves to exclude rival PIN debit networks, harm competition, and protect Visa’s monopoly.”

Discover paints the picture more fully.

“Visa’s anticompetitive post-Durbin Amendment actions do not stop there. In addition to forcing its own PIN authentication functionality onto all Visa signature debit cards, Visa also used its market power to alter the economics for merchants and acquirers when they choose a network on which to process their debit card transactions. In response to the Durbin regulations, Visa imposed a fixed network fee (called the Fixed Acquirer Network Fee, or “FANF”) that is triggered whenever a merchant accepts Visa credit or debit cards. If a merchant (through its acquirer) refuses to pay this onerous fee, it no longer is permitted to accept any Visa cards. Yet, dropping acceptance of Visa credit cards is not a practical option for the vast majority of merchants. Given the huge number of Visa cards held by consumers and Visa’s consequent ‘must have’ status, merchants have no realistic choice other than to pay the FANF.”

This is where the argument gets tricky. Discover argues that Visa is too important to merchants—because of its services and its extremely strong market position—for them to lose so they have to agree to almost whatever deal Visa proposes. But isn’t that market leaders are supposed to do, to leverage their advantage? Is that not done by the market leaders in E-Commerce, petroleum, hotels, automobiles and just about other market segment? There needs to be a line where such behavior becomes antitrust, but what are reasonable limits?

“Rival PIN debit networks lack the market power to match Visa’s scheme. And even though the scheme overall is a price increase for merchants and acquirers, the scheme excludes rival debit networks from undercutting the price increase. That is because the FANF is not a per-transaction fee, but a fee charged for having access to Visa’s network for credit or debit transactions. The only way a rival network could make an offer that would allow a merchant to avoid the price increase would be to persuade a merchant to drop Visa. No matter what offer another debit network might make, few, if any, merchants would be willing to drop Visa entirely to avoid the FANF. The net effect of this integrated FANF scheme therefore is reduced competition, higher debit network fees imposed on merchants and acquirers, and harm to consumers.”

In effect, Discover is arguing that Visa has skirted the intent of Durbin and is asking the court to make more stringent demands of Visa. “Compared to how the marketplace would have – and should have – evolved post-Durbin, Visa’s actions have resulted in higher profits for Visa, higher prices charged to merchants, acquirers, and issuers, higher prices for consumers, and less debit network volume and reduced competitive viability for rival PIN debit networks, including PULSE,” the lawsuit filing said. “In addition, as a direct result of its new debit strategy, Visa has acquired an unfettered ability to marginalize or eliminate competition from rival PIN debit networks. Visa’s anticompetitive conduct has already directly injured PULSE and, if unchecked, will continue to injure PULSE in a substantial manner.”

Click here to read the full text of the federal filing: