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A US appeal court has reopened a case by payment processing network Pulse, which alleges Visa practices have reduced competition in the debit card market.
Last week (April 5), the US Court of Appeals for the 5th Circuit reinstated two counts of Pulse’s antitrust lawsuit against Visa, saying a US District Court judge in Texas had improperly dismissed the case in 2018 when she said Visa’s practices affected only merchants and card-issuing banks rather than Pulse.
In the lawsuit, Pulse, which is owned by Discover Financial Services, argues that certain changes made by Visa in response to the Durbin Amendment were illegal.
The Durbin Amendment was adopted by Congress in 2011 with the intention of opening up competition in the debit card market in the US.
Pulse argued that following Durbin, Visa introduced a fixed acquirer network fee, which set a fixed monthly network fee rather than charging merchants only on a per-transaction fee.
Merchants had to pay the fixed monthly fee because, realistically, they cannot stop accepting Visa cards and to recoup the fixed fee, merchants were encouraged to route debit transactions through Visa’s networks, which charged lower per-transaction fees than its rivals.
Pulse also cited new agreements that Visa reached with card-issuing banks and merchants giving them rebates, discounts and other incentives to route a certain number of debit transactions each month over Visa’s networks.
The case will now head back to the District Court for the Southern District of Texas where it will be reassigned to a different judge.
"This ruling makes it clear that these practices will not be allowed to go unchallenged and sends a message that the days of giant card networks dominating the market are numbered," Stephanie Martz, general counsel of the National Retail Federation, commented.
The limits of Durbin
The clear intention of the Durbin Amendment was to open up competition in the debit card market in the US.
The amendment, to a certain extent, has been considered very successful in doing this. It provided the opportunity for smaller domestic card networks, such as Pulse, NYSE and Star to effectively compete with the likes of Visa and Mastercard by insisting on dual-badging of debit cards in the country.
As a result, it is claimed that it has benefited multiple stakeholders including merchants and consumers, as well the domestic card schemes.
However, it has its limitations.
“Durbin is a great regulation but there has been a massive frustration among merchant advocates who feel that Durbin has been misinterpreted by the card payments industry that has minimised its impact in a number of ways,” Callum Godwin, chief economist at payments consultancy, CMSPI, told VIXIO.
For instance, the law states that at least two unaffiliated networks need to be badged on each debit card issued in the US and merchants have full autonomy to choose which debit network they want to use to route their transactions over.
Durbin does not explicitly state anything about routing being exempted in non-authenticated transactions, but “unfortunately, it is just the way it has been interpreted and implemented by the payments industry”, Godwin said.
As a result, in a number of situations routing has not been made available for the merchants. These typically include online transactions, where a PIN is not employed, or signature transactions, where the customer would sign the transaction, a payment method still widely used in restaurants in the US.
Another gap in Durbin is related to the fact that the amendment has mandated competition in the debit card market only, but it left the credit card market untouched.
Visa and Mastercard “are very powerful in the credit card market. There is no routing, no choice, and no competition. It is outside the scope of Durbin,” Godwin stressed.
The card giants for a number of decades have held a dominant position in the credit card market. For that reason, merchants still have to accept Visa and Mastercard brands.
VIXIO understands that a lot of merchants are frustrated that Visa and Mastercard can use their market power in the credit card market to cross-subsidise efficiency in the debit card market.
Durbin in practice
Although 11 years have passed since Durbin was adopted, this is not a long time in terms of the market adjusting to the new rules, and the industry being able to analyse and challenge debated practices.
It will likely take decades until Durbin comes to any kind of maturity, a payments consultant told VIXIO.
The US is a unique market, not only because there are many local debit card schemes in the country, but also because the way Durbin has been implemented is very unique to the US market.
Many of the issues that are currently not addressed by Durbin would probably require new legislation, which is mainly a political question that comes down to issues such as the composition of the House and the Senate and the presidency.
However, Durbin is very much considered the exception rather than the rule, the payments consultant said, adding that this kind of new legislation typically faces lots of hurdles before getting through Congress. Until then, cases like Pulse’s suit against Visa will be able to serve as a legal precedent that the industry can rely on.
