Digital Transactions Authoritative, insightful and timely information for payments professionals
Over the past several years, during his conference calls with analysts to review Discover Financial Services’ quarterly earnings, chief executive David W. Nelms occasionally took swipes at Visa Inc.’s efforts to maintain its dominant debit card market share in the wake of the Durbin Amendment, which severely undercut Visa’s Interlink PIN-debit network. For example, in response to an analyst’s question in December 2012 about why transaction growth at the Discover-owned Pulse PIN-debit network had slowed down slightly, Nelms, without mentioning Visa by name, referred to the “Goliath in the industry” and its alleged “hijack-transaction actions.”
On Tuesday, Discover, through Pulse, took its gripes against Visa to U.S. District Court in Houston. In a 93-page civil complaint, Pulse accused Visa of being a “long-time monopolist” in the debit market and of instituting programs since Congress passed the Durbin Amendment as part of the 2010 Dodd-Frank Act to force more debit transactions to come Visa’s way, to the detriment of Pulse and other PIN-debit networks. The 10-count complaint alleges antitrust violations of the federal Sherman Act and of Texas law. Houston-based Pulse wants the court to put a freeze on Visa’s Fixed Acquirer Network Fee (FANF) price structure and its PIN-Authenticated Visa Debit (PAVD) program.
The complaint also asks the court to provide “all other relief necessary to restore lost competition in the debit network and signature debit network marketplaces, including any restructuring of Visa necessary to restore lost competition.” Pulse is seeking unspecified damages to be determined at trial and trebled under federal antitrust law.
In a statement, a Visa spokesperson said, “Visa is currently reviewing the complaint. We have no other comment at this time.”
The complaint reviews how Visa responded after the Federal Reserve Board’s regulations implementing the Durbin Amendment took effect in the fall of 2011. In addition to capping big banks’ debit card interchange, the Fed required card issuers to provide merchants with at least two unaffiliated network options for routing debit transactions. Many U.S. issuers at the time had exclusive relationships with Visa in which their signature debit transactions would go over the Visa network and PIN-debit transactions would use Interlink. In the months after the Fed’s rule took effect, Interlink, the largest PIN-debit network, lost more than half its volume.
Visa instituted PAVD and FANF as the main pillars of its recovery program. Pulse claims they divert transactions from smaller debit networks such as itself and enable Visa to earn higher profits.
PAVD derives from an obscure back-office capability that Visa had long maintained before Durbin but which was little used: its signature network could also process PIN-debit transactions. That capability suddenly became much more valuable after Durbin, according to Pulse. Visa now requires its signature debit card issuers “to include Visa’s PIN authentication functionality on their cards,” the lawsuit says. “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.”
FANF, meanwhile, is a network fee that goes to Visa in contrast to interchange, which is the biggest component of merchants’ Visa card acceptance costs and is paid to the issuer though set by Visa. FANF has a multitier fee schedule that essentially rewards merchant acquirers for sending more transaction volume, both debit and credit, to Visa. Pulse says merchant acquirers pass on some or all of the fee to their merchants, which can’t avoid it unless they drop acceptance of all Visa products. The lawsuit estimates Visa is generating $600 million to $900 million in new annual revenues from FANF.
The Merchant Advisory Group (MAG), a Minneapolis-based trade group for 82 major merchants including Best Buy, Target, Sears, and Wal-Mart, welcomed Pulse’s lawsuit. “The merchant community is interested in creating more competition in debit,” MAG chief executive Mark Horwedel tells Digital Transactions News. “Clearly, the PIN networks have been squeezed. Any lawsuit that might result in more competition would be welcome to the merchants.”
Terry Dooley, executive vice president and chief information officer for Johnston, Iowa-based Shazam Inc., a regional PIN-debit network linking more than 1,500 community financial institutions, says he was unaware of the lawsuit early this morning and so he wouldn’t comment on it. But he added that he does have concerns about what he calls “proprietary” technology for Europay-MasterCard-Visa (EMV) chip cards and tokenization being “pushed” on the payments industry by Visa and MasterCard Inc.
“There is resistance to open standards [at Visa and MasterCard] that everyone can innovate on,” he tells Digital Transactions News. “What we see with EMV and tokenization, there seems to be a movement [by the international networks] to drive proprietary solutions into the marketplace. What I can say is the implementation of this technology puts Shazam and other networks at a competitive disadvantage.”
—with additional reporting by Kevin Woodward and John Stewart
