Visa’s Incentives to Banks Examined by Justice Department

(Bloomberg) -- The U.S. antitrust investigation of Visa Inc. is scrutinizing deals the company has with banks to entice them to process more online debit-card transactions over its network -- spending that surged amid coronavirus lockdowns.

The Justice Department is probing incentives Visa offers banks that route more debit-card spending through its network, according to people familiar with the matter. The firm acknowledged an inquiry in a regulatory filing last month without elaborating on the specific issues at hand.

Representatives for Visa and the Justice Department declined to comment.

Visa’s shares pared earlier gains to trade at $219.41 at 12 p.m. in New York, up less than 0.1% after previously climbing 1.62%.

The outlines of the investigation, described by people on the condition they not be identified, show Visa faces scrutiny of a major business line, with potential repercussions not just for the U.S. financial industry but millions of stores, restaurants and other merchants across the country.

“The U.S. Department of Justice has informed Visa of its plans to open an investigation into Visa’s U.S. debit practices,” Visa said in last month’s regulatory filing. The company said it would cooperate and that it believes the business is “in compliance with applicable laws.”

Visa has signed deals with lenders including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., offering them payments or discounts that can burnish their earnings. There’s no indication banks are also subjects of the probe. As with all investigations, the scrutiny may not result in any accusations of wrongdoing.

Two Networks

At issue in the government’s inquiry, according to the people, is the so-called Durbin Amendment, passed in the wake of the 2008 financial crisis. The law required banks to put two unaffiliated networks on every debit card they issue. Merchants, then, are supposed to have the ability to choose which network handles transactions.

Banks typically issue debit cards with either Visa or rival Mastercard Inc., but there’s also a bevy of smaller, lesser-known networks with names like Pulse, Shazam and Star.

Alternative networks often charge a lower fee, averaging just 24 cents per transaction in 2019, compared with 32 cents for debit spending routed over Visa’s network, according to data compiled by the Federal Reserve. While the difference may be pennies, it’s all part of the more than $100 billion a year borne by merchants accepting electronic payments. Those costs are a longstanding source of frustration among retailers.

In recent months, those tensions have escalated, as retailers complained they’ve noticed some banks have begun to refuse to authorize debit-card transactions over alternative networks when a consumer doesn’t use a PIN, or personal identification number.

Using PINs

Historically, requiring a consumer to input a PIN for in-store transactions was doable -- customers were already used to the practice. But consumers don’t typically use PINs for online spending or mobile payments, leaving merchants with fewer options for routing in the digital world.

The issue came to a head as the pandemic shuttered stores across the country and encouraged consumers to place orders online, shifting a larger share of merchants’ sales to websites.

“Last year we did start hearing from some folks that as we’re seeing these cards online, they couldn’t see the second network,” Hannah Walker, vice president of political affairs at FMI, a food-industry association that represents retailers and producers. “It’s challenging because when we have competition between two networks, rates go down.”

The Justice Department is examining whether Visa’s deals with banks have something to do with that phenomenon, according to the people familiar with the matter.

Incentive Offered

Here’s how those deals typically work:

Say a bank sends $1 billion in debit-card spending over Visa’s rails in a year. For the following year, Visa might offer the bank an incentive -- which can come in the form of a discount on fees -- if the bank sends the same volume again. If the bank sends less, the incentive will be lower. If the bank sends more, the incentive can be significantly higher.

Visa, for its part, also inks such deals with major merchants and payment processors to entice them to send more volume over its network.

The deals with banks were cited in the Justice Department’s lawsuit last year seeking to block Visa’s proposed takeover of Plaid Inc. Authorities accused the payments giant of trying to buy the financial-technology firm to eliminate an emerging threat to its business of handling online debit-card transactions. The government pointed to the agreements with banks as an example of Visa’s history of using contracts to block potential competitors and protect a monopoly.

“Visa has inhibited the adoption of alternative lower-cost networks for online debit by disincentivizing banks from enabling the use of alternative debit networks,” the department wrote in a complaint filed in November.

Takeover Canceled

Visa and Plaid called off the takeover in January. While Visa vigorously contested the government’s analysis, Chief Executive Officer Al Kelly told analysts that it was clear authorities wouldn’t work to resolve the case quickly. “Therefore, we decided not to devote more time to this acquisition,” he said.

In its complaint, the Justice Department said Visa handles the lion’s share of online debit transactions in the U.S., with a market share that dwarfs that of Mastercard. Visa earned about $4 billion from the overall debit business in 2019, according to the complaint.

Visa has said it faces a lot of competition for online transactions, including from credit cards and Mastercard, which has won a number of debit-card portfolios from banks in recent years.

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