Visa will need to defend, for the second time, its debit card fees in an antitrust suit filed by payment processing network Pulse Network L.L.C. for practices that it claims reduce competition in the debit card market.
On April 5, the 5th U.S. Circuit Court of Appeals reinstated two counts of an antitrust suit against Visa after a U.S. District Court judge in Texas dismissed the case in 2018 when she said that Visa’s practices affected only merchants and card-issuing banks rather than payment processing networks. The court of appeals sent the case back to the District Court, but the case will be assigned to a new judge after the court criticized the slow pace of the litigation and questioned the impartiality of the judge in the first trial.
In previous litigations Visa had to defend its interchange fees. These are fees that issuers’ banks collect from merchants’ banks, and they represents the largest portion of the price merchants pay for debit transactions. However, in this case, the fees at stake are network fees. These fees are charged by debit network companies like Visa, Mastercard, Pulse, STAR and NYCE. Network fees are paid by both merchants and issuers and are typically low, averaging a few cents per transaction.
Pulse argues in this lawsuit that a “Fixed Acquirer Network Fee (FANF)” created by Visa violates federal antitrust law. Instead of charging merchants only a per-transaction fee, Visa began charging them a fixed monthly fee for using its debit network. Merchants must pay this up-front fee so long as they accept payment from any Visa product during the month. Visa continued to charge per-transaction fees, but they were substantially reduced from previous levels. According to Pulse, given the incentives created by this new pricing structure and Visa’s position in the market, the FANF has these effects: (1) merchants can’t refuse to pay the fixed monthly fee because they can’t stop accepting Visa cards, and (2) to recoup the fixed fee, merchants must route debit transactions through Visa’s networks, which charge lower per transaction fees than do Visa’s rivals.
In addition to this FANF, Visa entered various volume-based agreements with issuers and merchants offering incentives to merchants to route certain number of transactions each month over Visa’s networks. Pulse argues that Visa is using its position to force merchants to accept fees that they wouldn’t ordinarily accept.
Visa claims that Pulse is harmed only by the increased competition created by the cheaper per-transaction fees (FANF) rather than some anticompetitive aspect of the price structure.
The court was persuaded by Pulse arguments, as these are the two counts that have been remanded to the lower court for review. Nonetheless, the court dismissed one of Pulse’s arguments where the company alleged that a new “PIN-Authenticated Visa Debit (PAVD)” program was an illegal tying arrangement that required issuers to enable PAVD on any Visa signature debit card.
Visa will now have to defend its FANF and the volume-based agreement in the District Court, which could take into account this precedent from the Court of Appeal. The appeal court didn’t rule on the merits of the case — therefore, it didn’t say whether these agreements violate any antitrust laws.
Notably, this case only affects Visa and Pulse in the state of Texas; other card networks or payment processing networks won’t be affected by the result of this case.
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