In our recent paper on bank-merger policy, we noted that over-stringent merger policy is likely to lead to unintended and perverse consequences. This emphatically is not to say that all bank mergers are good mergers, but rather to emphasize that blocking all mergers based on arbitrary criteria may well backfire and lead to still-greater concentration in a market defined as much by regulatory-arbitrage opportunities as competitiveness. Case in point: Justice may rightly want to bring Visa to heel, but its bank-merger policy could simultaneously block the kinds of bank consortia that would otherwise be able to continue market-critical card processing and also bring it under the regulatory umbrella. If DOJ successfully sues Visa, its bank-merger policy is likely to replace one disgraced omnipotent network-effect competitor with another omnipotent network-effect competitor rather than one or more regulated networks comprised of regulated, competing banks.
One of the often-overlooked – but very important – aspects of new merger policy from the Department of Justice is its dark view of financial networks and platforms. These are of course most pertinent in the payment system where, as one payment executive recently put it, “payment is a matter of volumes. If you don’t have volumes, you don’t have the capacity to be competitive.” Put another way, payment systems are network-effect entities and, unless Justice understands this, the only bank payment-system providers will be one or more of the very biggest banks that don’t need third-party networks to generate scale. Existing bank consortia of different-sized banks now challenging giant tech-platform companies face antitrust threats that may force them to cede markets to the largest players whose organic growth never comes under DOJ review.
The heart of DOJ’s case against Visa is the firm’s dominant debit-market position that even squeezed out once-powerful competitors such as Mastercard. Legacy debit-card systems controlled by bank consortia now have only a small bit of the pie they once dominated, driven out by what Justice believes is Visa’s ability to arbitrage the Durbin Amendment’s price clamp on big banks to gain a market share of as much as 75 percent and an 80 percent margin (or so the complaint alleges).
Debit-card processing is a two-sided business involving both merchants and consumers, making it a particularly complex antitrust nut to crack. It’s certainly not my intention even to attempt to do so in this note. But, no one looking at the Visa complaint I know of has accurately judged its future impact because one must put it in the context of DOJ’s new bank-merger policy to do so.
As noted, the merger policy takes a very dim view of bank consortia. The thinking here is directly comparable to that in the Visa complaint, except that the bank-merger policy is founded on theory, not actual market share.
DOJ’s avowed goal in seeking to disembowel Visa is to create market openings for other competitors. Who might these be? The complaint asserts that Visa pays Apple and PayPal to stay out of this business. If this is true and Visa can no longer make this worth Apple and PayPal’s while, then these tech platforms may well pick up at least some of Visa’s pieces, making their systemic footprint even bigger and deeper. DOJ won’t like this much better than Visa, but this is its own fault unless it allows bank networks also to compete in debit-card processing.
To be sure, the Visa case might not ensure regulated, meaningful competition even if DOJ stands down on its threat against bank-owned networks. Banks hypothetically could cut off these tech platforms at the competitive pass by reviving their legacy debit-card networks. This would bring debit infrastructure back within the regulatory perimeter, but banks may simply not be able to re-enter this business due to the Durbin fee restrictions that helped to push them out in the first place, especially if the Fed cuts pricing even more by its pending rule.
Which leaves merchants and consumers with what’s left of Visa, Mastercard (the largest competitor now after Visa), and tech-platform companies or, perhaps new networks owned by core service providers that have been known to use their market power just as ruthlessly as Visa is alleged to have done. Will any of this serve merchants and consumers any better than the current system, even after taking Visa’s alleged price-gouging into account? It may take some time for the market to realign if Justice prevails against Visa, but DOJ is unlikely to like the debit-card processing market it creates any better than the one it broke up. Markets driven by economies of scope and scale with embedded competitors eager to use their powerful markets are not easily undone, especially if antitrust zeal precludes competition from regulated banks that might, just might, be able to challenge nonbanks if they can muster network effects for at least some pricing advantage.