These last months, Visa (V 4.28% ) has been the subject of two separate rounds of government review. Last week, the Justice Department announced an investigation into the payment processor’s competitive practices, saying Visa was stifling competition by preventing merchants from routing transactions through competing payment networks that charge lower fees. And before that, the company has recalled its merger with emerging fintech Plaid following a DoJ lawsuit that called Visa a “monopolist in online debit transactions.”
Regulatory issues are often part of the game when long-term investors buy shares of large companies in leading positions in the market. The question is how will the increased scrutiny by the Justice Department impact Visa?
The industry is increasingly monitored by the Department of Justice
The Justice Department has taken Visa under a microscope in recent months, criticizing measures it says violate antitrust laws. In November 2020, the ministry sued Visa over its agreement to acquire Plaid, a fintech which allows customers to connect their bank accounts to financial apps like Chime, Acorns, and Stripe.
Visa had initially agreed to pay $ 5.3 billion for Plaid in 2020, with the vision that it would complement Visa’s existing product line. However, the Justice Department alleged that Plaid was developing a payment network that would have competed with Visa and that the acquisition of Visa was blocking the competition. In January, the companies mutually agreed to cancel the deal.
Al Kelly, CEO of Visa, said at the time: “We are confident that we would have been successful in court. … We believe that the combination of Visa and Plaid would have brought significant benefits. However, it has been a year since we announced our intention to acquire Plaid, and protracted and complex litigation will likely take a long time to be fully resolved. “
According to former Deputy Attorney General Makan Delrahim in a January Justice Department statement: “Now that Visa has abandoned its anti-competitive merger, Plaid and other future fintech innovators are free to develop potential alternatives to debit services in Visa line. With more competition, consumers can expect lower prices and better service. “
A closer look at debit card transactions
The Justice Department also looked at Visa to find out how it routes debit card purchases. This criticism stems from what is known as the Durbin Amendment – which is part of the Dodd-Frank Law past after the global financial crisis – which forced merchants to route transactions through two unaffiliated debit card networks. Traders alleged they couldn’t route transactions through existing smaller networks, like NYCE and Shazam, and were forced to pay higher transaction fees as a result.
The Justice Department has targeted online debit card transactions, of which Visa accounts for 70%. Specifically, the department investigates network charges – those charges that customers don’t see but are passed on to merchants, which end up being passed on to customers in the form of higher prices.
In its fiscal year 2020, which ended in September, Visa reported 204 billion payments and cash transactions on its Visa brand and processed 141 billion of those transactions, or nearly 70% of its transactions. Its data processing revenues during the year amounted to nearly $ 11 million in revenues, or more than 50% of the company’s revenues, and could feel the impact of a possible litigation.
Industry-wide ripple effects
The application of antitrust laws could have an impact on Visa’s main competitor, MasterCard, also. The Justice Department asked about Mastercard’s role in the debit card market and the role fintech companies play in the payments landscape. Samer Musallam, an antitrust partner of Ropes & Gray, said Call in March, “I think we’re going to see more attention in the industry, this is one of those spaces that antitrust authorities are interested in.”
The measures taken by the Department of Justice could have a positive impact on smaller payment competitors, such as NYCE, Shazam and Star. Additionally, closer scrutiny of transactions may make it more difficult for large players in the industry to acquire fintech companies like Plaid. However, not all agreements face the same criticisms. The Justice Department says it is focusing on transactions where it believes competition is compromised, as evidenced by its allowing transactions such as Mastercard to acquire financial data providers Finicity and American Expresspurchase from online small business lender Kabbage with less scrutiny.
Since Visa’s deal with Plaid collapsed, it’s clear that federal regulators have taken a particular interest in the company’s practices. While Visa investors should not be rushing to sell at this time, they should closely monitor news regarding antitrust litigation and increased regulatory scrutiny, which could impact the growth in earnings and results of the company.
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