The now-you-see-it, now-you-don’t shuffle of interchange-rate changes planned for April may have betrayed a rare introspective moment at the payment networks—which are long used to imposing their fees and rules on the rest of the payments ecosystem at will. And that makes it hard to resist wondering what might be triggering that consideration.
As we saw over the past year, industry regulators—led by the Federal Trade Commission and now the Justice Department—appear to be exercising a good deal more scrutiny on the payments system than usual. Just last week, the DoJ launched another investigation of Visa and Mastercard, centered on their fees and implementation issues with Durbin Amendment compliance (which followed on FTC’s formal inquiry launched in February.
And, lest we forget, in January the DoJ took the unusual action of putting the kibosh on Visa’s acquisition of account aggregator Plaid, citing potential anti-competitive domination by the network of the rapidly emerging market for account-to-account (A2A) payment alternatives.
But this first of a two-part temperature-check on the industry looks at a development that might seem a bit perplexing—Intuit’s lawsuit, launched in February, against Visa and Mastercard and alleging a number of anti-competitive actions by the networks, including price-fixing, restraint of trade and monopolistic suppression of the debit card market. A coincidence? Maybe not.
This antitrust suit is different in some ways from other legal actions by merchants in the recent past. Intuit is going it alone rather than assembling a collection of merchants to help shoulder the substantial legal costs. Also, there is the emphasis Intuit puts on network practices that the complaint says are “forcing ISOs, PayFacs, and consumers to accept outdated, less secure products” and that are making both merchants and issuers pay anti-competitive fees. And a third difference is the timing of this lawsuit. Why now?
Going it alone on an antitrust suit avoids the complications of working with dozens or hundreds of other merchants in lengthy court proceedings. Kroger’s recent success in its own legal action might have served as a model for future actions of this kind.
Many of the claims in the suit echo the same historic merchant grievances over network rules and rates expressed in other merchant actions, especially the honor-all-cards rule, which most view as the foundation enabling the monolithic imposition of interchange rates.
And Intuit, which has more than two dozen subsidiary companies, claimed it paid “billions in interchange and network fees” as a merchant when its consumer customers bought its software during the period August 2004 to present. That’s plenty of incentive for a big, successful merchant to act independently, so more such suits could certainly be looming.
Concern for network practices that adversely affect downstream payment participants like ISOs and payfacs makes sense, too. Intuit has served in both roles on behalf of its software customers that process their payments through the company, and the complaint conveys Intuit’s frustrations in playing these roles in the payment ecosystem, as well. The complaint also blames issuers as ”co-conspirators” and acquirers as “gatekeepers” for the bank card system, “imposing restrictive rules on merchants, ISOs and PayFacs” to keep them compliant—for instance, using sub-standard signature-authenticated credit and debit cards.
“Visa’s and Mastercard’s success in forcing merchants, ISOs, PayFacs, and consumers to accept and use technologically-inferior, and in fact defective, products—including products that Visa and Mastercard knew would increase fraud—not only advanced the goals of the conspiracy,” the complaint reads, “but also is further evidence of their substantial market power.”
Okay, but why now? EMV has worked its way mostly through the U.S. payments market like the proverbial “pig through a snake’s belly,” leaving remote transactions as the remaining gaping wound in payment card security. Concerted efforts by the networks with the latest version of 3-Domain Secure in Europe and Click-2-Pay are, in theory, progressing (however fitfully). In an era of Covid, can’t we all just get along?
The Intuit suit perhaps provides some clues to what might be a sea change in interchange politics—a convergence of long-boiling merchant complaints with refreshed regulatory zeal. Notably, the complaint expresses Intuit’s continuing abhorrence over FANF—Visa’s Fixed Acquirer Network Fee, which was imposed NINE years ago!
FANF, as readers might recall, is “effectively a fee merchants, ISOs, and PayFacs must pay to be a part of the Visa network,” the complaint reads, adding, “[t]his new fee is nothing more than a creative and anticompetitive mechanism for penalizing merchants, ISOs, and PayFacs for routing debit transactions over any rival debit network.” Implementation of the fee essentially undid the separation of debit from honor-all-cards, hard-won by merchants in the Walmart interchange suit settled in 2003, by leaving the merchant no way to mitigate the fee unless it routes debit volumes along with credit to the network.
Further, FANF discriminates against merchants and others for routing transactions over competing PIN-debit networks, the complaint reads. This is because, in addition to paying the special fees to be a part of the Visa network regardless of which PIN-debit network they route through, merchants, ISOs and payfacs wind up effectively paying twice for the same debit transaction, according to the suit.
On top of that, issuers are disincented from contemplating the use of rival PIN-debit networks by the network’s 5-year-old Delayed De-Conversion Assessment (DDCA) fee, which kicks in if issuers experience “sustained material decline in Visa payment volume or card counts” or demonstrate “an intent to change business status or network affiliation,” according to the complaint.
In other words, if an issuer contemplates working with merchants to leverage safer and more cost-effective PIN and PINless debit routing, higher fees are the penalty for doing so.
Both FANF and DDCA were part of nearly a dozen complaints a group of merchants made to the DoJ and FTC in 2019 as indicative of both technical and business impediments the networks have erected to discourage use of PIN/PINless debit and merchant routing choice under Durbin. Lo and behold, the chickens, it appears, have come home to roost in the formal investigations by the FTC and now the DoJ.
Perhaps that’s why, just a few weeks ago, an announcement quietly came over the ether stating that a Payments Leadership Council (“PLC”) had been created, joining the chief executives of the major networks—Visa, Mastercard, American Express and Discover—with the CEOs of FIS, Fiserv, and Global—the marketplace heavyweights representing issuers and the acquirers—in the stated mission “to share their unique insights on the innovations that have enabled leadership in global commerce and economic growth in order to promote effective public policies responsive to current and future challenges facing the U.S. economy.”
“The Payments Leadership Council recognizes the unique and critical role the payments industry will play in the country’s economic recovery,” the PLC’s joint statement read. “We will work with policymakers to promote inclusive growth, protect consumers, foster inclusion, cultivate innovation, and support a dynamic ecosystem for payments.”
Is the PLC an effort by the feudal lords of card payments perched atop their bastions and bulwarks to pour boiling oil down on the desperate merchants pounding at the castle gates? Or a fig leaf that might point to a pathway for the entire card payments ecosystem to take a broader, holistic approach to fair, safe, and efficient transacting? We don’t know because there has been nothing made public about the effort since it was announced. But the stage is certainly set to find out if card payments are headed to the courts in a big way in this new, emerging, Covid-impacted moment of business morality.
The bottom line on the Intuit suit is that it provides another important set of clues to how the long-boiling confrontation over network rules and rates might play out. It cites extensively the European Union’s largely successful efforts to rein in the networks through sustained regulatory and legal challenges. These challenges might be providing a foundation for antitrust actions that are making their way to the U.S. legal battlefield.