Home Business Visa Debit Card Business:  Is it Anti-Competitive?

Visa Debit Card Business:  Is it Anti-Competitive?

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Discover Financial Services (NYSE:DFS) through its unit, Pulse Network LLC filed a case against Visa (NYSE:V) on allegations that it is using anti-competitive practices in running its debit-card business.

Discover’s allegations against Visa

In its lawsuit, Discover argued that Visa Inc (NYSE:V)  practiced illegal behavior to maintain monopoly that “undermines competition— harming rival debit networks, merchants, acquirers, card issuers, and consumers.”

Discover’s Pulse Network requires customers to authorize debit transactions using a personal identification number (PIN) while Visa requires customers to approve their debit transaction with a signature.

“Visa has a long history of making sure that PIN debit does not predominate, including undertaking illegal behavior to fend off competitive threats to its debit network services monopoly,” according to the lawsuit of Discover Financial Services Inc (NYSE:DFS).

Discover is disputing the new rule implemented by Visa Inc (NYSE:V) that requires financial issues of Visa signature debit card to also include its PIN services instead of using other PIN services such as Discover’s Pulse Network.

Analysts explain Visa’s debit card business strategy

Sterne Agee analysts, Thomas McCrohan and Leonard DeProspo said the argument of Discover Financial Services Inc (NYSE:DFS) that the debit practices of Visa Inc (NYSE:V) are anti-competitive would imply that merchants are paying higher prices for debit card transactions.  However, the analysts noted it was not the case.

In a note to investors, McCrohan and Deprospo explained that Discover’s lawsuit was related to Visa’s new strategies to reduce the market share losses of its debit card business following the implementation of the Durbin mandate routing rules on April 2012.  The rules are intended to lower debit card processing rates under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The interlink PIN debit network of Visa Inc (NYSE:V) lost 54% of its volume the following quarter. To limit the negative impact of the Durbin mandate on its debit card business, Visa launched the Fixed Acquirer Network Fee (FANF), a volume-based pricing strategy that provides economic incentives to merchants for directing more debit volume to the company regardless of how debit transactions are authenticated.

Visa Inc (NYSE:V) also introduced the PIN-Authenticated Visa Debit (PAVD), a technology that allows PIN to authenticate debit transactions processed through its Signature debit network (ViaNet).

Declining prices on debit transactions contradict anti-competitive claims

McCrohan and DeProspo pointed out that the declining prices in debit transactions are contrary to the anti-competitive claims of Discover against Visa.

The analysts noted that competition became stronger between networks and various EFT networks to win volume from merchants after the implementation of Durbin mandate. McCrohan and DeProspo emphasized that the basis for the competition was the net cost of acceptance.

The analysts said, “Visa pricing strategies are effectively bundled pricing, which puts downward pressure on prices, consistent with what is seen in competitive markets.”

McCrohan and DeProspo also quoted First Annapolis, an industry consultancy firm, which commented on the issue, “These network innovations should further enhance the level of competition for debit transactions at the merchant level.”

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