The Gathering Regulatory Storm for Visa and Mastercard

The Gathering Regulatory Storm for Visa and Mastercard

By: John Donnelly

August 15, 2022 — The dominance of Visa Inc. (V) and Mastercard Inc. (MA) in traditional electronic payments—debit and credit cards—has rarely been questioned. If consumer spending increased, the two companies benefitted, aided by the ongoing move away from cash and paper checks. We believe this dynamic is slowly shifting as the market power of the two companies is drawing greater scrutiny from regulators and legislators.

According to Federal Reserve data, Visa’s and Mastercard’s dual-message debit networks route 65% of all debit transactions, including 94% of card-not-present (CNP) transactions. We estimate that when including Interlink and Maestro, the single-message networks owned by Visa and Mastercard, respectively, the market share increases to around 85% of all debit transactions and 97% of CNP debit transactions. Similarly, the two companies account for 83% of all general-purpose credit cards.

The Fed appears poised to intervene again in the debit market by clarifying that provisions in Regulation II that implement the Durbin Amendment requirement for the availability of two unaffiliated routing networks for any transaction explicitly apply to CNP transactions.

Retail industry groups argue that Visa and Mastercard use their market influence to charge excessive swipe fees, which consist primarily of interchange, a fee that is set by the networks but paid to the financial institution issuing the card. The Fed appears poised to intervene again in the debit market by clarifying that provisions in Regulation II that implement the Durbin Amendment requirement for the availability of two unaffiliated routing networks for any
transaction explicitly apply to CNP transactions. The Fed’s submission to the semiannual unified regulatory agenda indicated these amendments to Regulation II would be finalized in July (which has come and passed), so we expect they will be released imminently. We anticipate this will shift the dual-message CNP market share closer to the card-present share of around 57% of transactions.

The change to CNP routing requirements can have an outsized impact, beyond the roughly 30% of the debit market it currently represents. Not only is CNP growth outpacing in-person transactions (Visa’s payments volume index shows 64% growth in the past three years for CNP compared to 29% growth for card-present), but the market is highly concentrated. Market studies suggest that Amazon.com (AMZN) controls somewhere between 40%–50% of ecommerce in the US and sophisticated, high-volume retailers such as Amazon and Walmart Inc. (WMT) are likely to optimize every transaction to minimize swipe fees. Furthermore, the companies have their own advanced antifraud practices, reducing the value of one of Visa and Mastercard’s primary advantages.

The change to CNP routing requirements can have an outsized impact, beyond the roughly 30% of the debit market it currently represents.

Senator Dick Durbin (D-IL), whose eponymous Durbin Amendment established regulation for the debit market, has now shifted his focus to credit cards. Alongside Senator Roger Marshall (RKS), he introduced the Credit Card Competition Act in late July. The bill would impose dual routing requirements on Visa and Mastercard credit cards issued by banks with more than $100 billion in assets. While we are skeptical of the bill’s chances—given inherent differences in how debit and credit work and lawmakers’ general reluctance to intervene between financial institutions and retailers— the prevailing view on Visa and Mastercard from Congress appears increasingly negative.

Rhetoric related to Visa and Mastercard has escalated as well. In the press release alongside the Credit Card Competition Act, Sens. Durbin and Marshall consistently called the two companies a “duopoly.” The bill followed a May 2022 hearing on swipe fees by the Senate Judiciary Committee, which is chaired by Sen. Durbin and focuses primarily on competition issues. In a 2020 complaint seeking to block Visa’s proposed acquisition of the Plaid Inc. platform, the US Department of Justice (DOJ) asserted that “Visa is a monopolist in online debit transactions.”

Rhetoric related to Visa and Mastercard has escalated… the US Department of Justice (DOJ) asserted that “Visa is a monopolist in online debit transactions.”

The arguments against the companies are not new. DOJ settled an antitrust lawsuit with the companies in 2010 related to interchange pricing. Historically, the networks have responded to increased competition by adjusting agreements with issuing banks and retailers to maintain their market share. However, we believe civil investigative demands that DOJ issued into Visa’s debit competition with other payment methods and networks, and by the Federal Trade Commission (FTC) into Visa and Mastercard limiting merchant choice in debit routing, limit
their ability to counter competitive threats. While we do not expect a sudden change in the market position for Visa or Mastercard, we believe the combined effects of the ongoing challenges represent the most significant regulatory headwinds for the companies since the 2010 Durbin Amendment.

John Donnelly

John Donnelly, Financial Services Analyst

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