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The Justice Department Is Investigating Visa. Here's How It Could Impact the Company

By Courtney Carlsen - Mar 24, 2021 at 6:04AM

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Months after suing the company over its acquisition of Plaid, the government is now investigating Visa for anticompetitive practices.

In recent months, Visa (V -1.97%) has faced two separate rounds of government scrutiny. Last week, the Department of Justice announced an investigation into the payments processor's competitive practices, saying Visa was stifling competition by blocking merchants from routing transactions through rival payment networks that charge lower fees. And before that, the company called off its merger with emerging fintech Plaid in the wake of a DoJ lawsuit that called Visa "a monopolist in online debit transactions."

Regulatory issues are frequently a part of the game when long-term investors buy shares of huge businesses with market-leading positions. The question is, how will the increased scrutiny from the Justice Department impact Visa?

Department of Justice sign on a wall.

Image source: Getty Images.

Industry faces increasing scrutiny from the Justice Department

The Justice Department has put Visa under the microscope in recent months, criticizing moves that it says violate antitrust laws. In November 2020, the department sued Visa for its deal to acquire Plaid, a fintech that allows customers to connect their bank accounts to financial apps like Chime, Acorns, and Stripe.

Visa had originally agreed to pay $5.3 billion for Plaid in 2020, with visions that it would complement Visa's existing product suite. However, the Justice Department alleged Plaid was developing a payments network that would have competed with Visa, and that Visa's acquisition was blocking the competition. In January, the companies mutually agreed to call off the deal.

Al Kelly, Visa's CEO, said at the time: "We are confident we would have prevailed in court. ... We believe the combination of Visa with Plaid would have delivered significant benefits. However, it has been a full year since we first announced our intent to acquire Plaid, and protracted and complex litigation will likely take substantial time to fully resolve."

According to former Assistant Attorney General Makan Delrahim in a January release from the Department of Justice: "Now that Visa has abandoned its anticompetitive merger, Plaid and other future fintech innovators are free to develop potential alternatives to Visa's online debit services. With more competition, consumers can expect lower prices and better services."

Debit card transactions under the microscope

The Justice Department has also scrutinized Visa for how it routes debit-card purchases. This criticism stems from something called the Durbin amendment -- part of the Dodd-Frank Act passed after the global financial crisis -- which requires merchants route transactions through two unaffiliated debit-card networks. Merchants have alleged they are unable to route transactions through smaller networks that exist, like NYCE and Shazam, and have been forced to pay higher transaction fees as a result.

The Justice Department has targeted online debit card transactions, of which Visa makes up 70%. Specifically, the department is investigating network fees -- those fees customers don't see but which are passed on to merchants, which eventually get passed on to customers in the form of higher prices.

In its fiscal 2020, which ended in September, Visa reported 204 billion payments and cash transactions on its Visa brand and processed 141 billion of those transactions, nearly 70% of its transactions. Its data processing revenue during the year accounted for nearly $11 million in revenue, over 50% of the company's revenue, and could feel the impact from potential litigation.

Ripple effects across the industry

Antitrust enforcement could impact Visa's main competitor, Mastercard, as well. The Justice Department has inquired about Mastercard's role in the debit card marketplace and the role fintech companies play in the payments landscape. Samer Musallam, an antitrust partner at Ropes & Gray, told Roll Call in March, "I think we are going to see more scrutiny in the industry, it's one of those spaces that are of interest to antitrust enforcers."

Digital image of financial technology.

Image source: Getty Images.

The moves by the Justice Department could have a positive impact on smaller payments competitors out there, such as NYCE, Shazam, and Star. Additionally, increased scrutiny of deals could make it harder for big players in the industry to acquire fintech firms like Plaid. However, not every deal faces the same criticism. The Justice Department says it is focused on deals where it feels competition is harmed, as evidenced by it allowing deals like Mastercard acquiring financial data providers Finicity and American Express' purchase of online small-business lender Kabbage with less scrutiny.

Since Visa's deal with Plaid fell through, it's clear federal regulators have taken a specific interest in the company's practices. While Visa investors shouldn't rush to sell right now, they should keep a close eye on news around antitrust litigation and increasing scrutiny from regulators, which could impact the company's top- and bottom-line growth.

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Stocks Mentioned

Visa Inc. Stock Quote
Visa Inc.
V
$199.99 (-1.97%) $-4.01
American Express Company Stock Quote
American Express Company
AXP
$156.10 (-3.55%) $-5.75
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$335.90 (-0.87%) $-2.96

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