If she hadn’t chosen to go into the law, Doha Mekki would have made an excellent research analyst. As Principal Deputy Assistant Attorney General in the US Department of Justice Antitrust Division, Mekki recently filed a monopolization suit against payments network Visa. Her case reads like a bullish stock report. Drilling down on the company’s US debit card business (which makes up around a fifth of group net revenue), it hits all the highlights:

• A big market: American debit card volumes exceed $4 trillion a year and they keep growing. 

• High market share: In the US, more than 60% of debit transactions run on Visa’s debit network.

• An even higher market share in the growing segment where a consumer’s card is not present, e.g. online transactions. Visa has 65% of this market.

• Dominant position over rivals: Mastercard ranks second with a 25% share; no other competitor – not STAR (owned by Fiserv), nor NYCE (owned by Fidelity National Information Services), nor Pulse (owned by Discover) – has more than a single digit share of debit transactions. 

• Scale on both the bank issuer and merchant sides of the debit market, boosting Visa’s appeal to both groups and creating powerful network effects.

• Durable relationships with bank issuers because of high switching costs: The expense of re-issuing new debit cards to customers keeps banks from churning to different primary networks.

• Healthy toll of around 19 cents of net fees per $100 of debit volume.

• Limited balance sheet risk: Visa bears none of the financial risk from card fraud.

• Fat margins: Visa has an 83% operating margin across its North America franchise, bolstered by the contribution from debit.

• High incremental margins: “The incremental transaction comes with little incremental cost,” Mekki quotes a former chief financial officer as saying.

• Strong partnerships with would-be competitors like PayPal, Square and Apple.

And to top it off, the report provides a detailed overview of how the US debit card market functions. If you’re looking for a primer, this is it. 

Yet Doha Mekki isn’t a buyer: She thinks the story’s too good to be true. Her case makes two points:

First, she contends that Visa uses pricing maliciously to trap market share and prevent participants from using other payment networks. Although Visa may be the headline act, its brand prominent on the front of cards, issuing banks are required by law to offer an alternative network whose logo is normally displayed on the back. Recognising that it has a natural monopoly on transactions where it is the only network available to both merchant and issuer, Visa offers customers a deal to capture transactions that could theoretically flow over alternative networks. In return for exclusive routing on all transactions, merchants get a pricing discount on their entire volume. Absent a routing agreement, merchants are charged the rack rate, which the Department of Justice argues is punitively high.

Mekki concedes that at least 45% of Visa transactions can’t be processed elsewhere, but she suggests that the network uses control over those to demand exclusivity over the rest. Her report describes an example of a fast-food restaurant that can choose to do all its volume through Visa at a discounted rate of $0.25 per transaction, or take its discretionary volume elsewhere and do its captive volume at a rack rate of $0.50 per transaction. Assuming half has to stay at Visa, it makes no sense to take the other half elsewhere unless the rival network can do it for free (unlikely). In 2023, one merchant was reportedly paid $20 million through such an arrangement to channel all its volume through Visa.¹

Mekki’s second point is that Visa uses monopoly power to prevent potential rivals from entering the market. A key risk to the company is that networks emerge capable of facilitating payments direct from a consumer’s bank account to a merchant. With deep existing relationships among both consumers and merchants, tech companies like PayPal, Square, Apple and Google are well-placed to provide such a service. Yet as merchants themselves within Visa’s ecosystem, they are bound by contracts which the Department of Justice claims are structured to dissuade them from competing. 

Mekki cites Visa management to support her argument. “Everybody is a friend and a partner. Nobody is a competitor,” CFO Vasant Prabhu told investors at a Bernstein-sponsored conference in 2023. “The only issue is to figure out how to make it worth their while to partner with us.” To an antitrust enforcer, a business with no competitors is a red flag.

This is not the first time competition authorities have gone after Visa. As long ago as 1971, a small bank in Little Rock, Arkansas, filed an antitrust lawsuit against the company claiming that a Visa rule preventing it from also being signed up to Mastercard amounted to an illegal group boycott. While the case was settled out of court, Visa remained exposed to similar lawsuits and asked the Antitrust Division of the Department of Justice for clarity to pre-empt further action.²

It was the start of a litany of litigation that has been a feature of the company’s history ever since. No wonder Visa retains an in-house legal staff of around 670, according to LinkedIn. In her latest salvo, Doha Mekki asks the court “to put a stop to Visa’s exclusionary and anticompetitive schemes, unfetter the markets of Visa’s unlawful monopoly, remedy the harm Visa has caused, deny Visa the fruits of its statutory violations, and prevent the recurrence of these violations of in the future.” 

Against this barrage, can Visa hold onto its position? To see how we got here and how it may pan out, read on...