Discover's lawsuit this week against Visa stems from years of practices that have their root in the Durbin amendment's debit-routing mandates, and Visa will likely have several ways to counter its rival's allegations.
Acting for its Pulse Network LLC PIN debit network, Discover claims in its Nov. 25 lawsuit that, to recoup lost debit revenue, Visa has "undertaken a series of illegal actions that undermine competition" and has harmed debit networks, merchants, acquirers, card issuers and consumers. Visa spokesperson Paul Cohen said the company "has received the complaint and we are reviewing it."
Visa began implementing new strategies two years ago after the Durbin amendmentawarded merchants a choice of at least one PIN debit network and a separate signature debit network for routing; previously, merchants could have just one network. Visa provided an incentive for merchants accepting PIN debit cards to route the transactions over its signature debit network.
Visa's PIN debit network, Interlink, lost 54% of its volume in the first quarter after Durbin took effect in April of 2012, much of that going to MasterCard's Maestro debit network and some also going to Discover's Pulse, according to Sterne Agee analyst Thomas McCrohan.
After losing volume to PIN networks, Visa responded by offering lower rates for merchants that steer more debit transactions to Visa. In addition, the card brand began routing PIN debit transactions over its signature network.
At the time of these changes, Visa executives said they were regularly submitting information to the Justice Department, which in March of 2012 opened an investigation into Visa's debit strategies. The Justice Department has not yet acted on that investigation.
In the lawsuit, filed in the southern district of Texas, Houston division, Discover alleges that:
- Rather than compete on its own merits after Durbin, Visa chose to "tilt the competitive playing field to its advantage" by requiring issuers of Visa signature debit cards to include Visa's PIN authentication functions on their cards. Thus, Visa avoided the type of competition other networks engage in to secure that type of business.
- Many of Visa's past maneuvers are based on its emphasis on signature debit "despite the significant advantages of PIN" and that the card brand is the main reason PIN has not been fully established in the U.S. "Permitting the superior PIN debit to predominate in the marketplace would cost Visa a lot of money," the suit says.
- Visa imposed a fixed acquirer network fee whenever a merchant accepts a Visa credit or debit card. If the merchant refuses to pay this fee, it is no longer permitted to accept any Visa cards.
- Visa's "anticompetitive conduct" has already directly injured Pulse and, if unchecked, will continue to injure Pulse in "a substantial manner."
But according to experts, things are not as clear-cut as Discover's claims state.
"Visa has changed its practices by charging retailers a direct fee, which allows them to lower the variable costs for transactions," said Gil Luria, analyst with Los Angeles-based Wedbush Securities. "It is a change in their market structure, but whether it is illegal or not is for the courts to decide. I can see where Discover sees it as unfair because retailers don't really have a choice of whether to accept Visa or not."
According to McCrohan, the fixed network fee is a volume-based strategy that offers economic incentives to merchants for directing more debit volume to Visa, regardless of how the transaction is authenticated, McCrohan said. The falling prices in debit actually run contrary to the claims of being anti-competitive, McCrohan added.
"Discover's argument that Visa's debit practices are anti-competitive would imply merchants are paying higher prices for debit card transactions, which is not the case," McCrohan said.
Because the Justice Department never cited Visa for any wrongdoings, Discover "appears to be implying they are no longer willing to wait for the federal government to complete its investigation," McCrohan said.
Visa has solidly stood by its preference for signature debit, even during the EMV chip-card migration in the U.S. EMV cards are typically called "chip and PIN" because they are so often used with a PIN, and many merchants, issuing banks and networks have said a PIN is vital to EMV security.
Visa says using signatures for EMV debit and credit payments is less expensive and disruptive than requiring a PIN.
In a statement sent to PaymentsSource, Discover said Pulse wants debit networks to "prevail by competing on their merits," and the company's lawsuit is meant in part to "promote healthy competition for general-purpose debit card network services in the United States."
Though it is not mentioned in the lawsuit or in the company's statement, Discover may also be reacting to the outcome of the movement to adopt common application identifier technology for routing EMV debit transactions in the U.S.
Early on in the debate over how the common AID technology would be implemented and governed, the independent PIN debit networks first leaned toward using Discover's technology to implement that process. Over time, MasterCard and Visa agreed to share their technology as an open standard to ease the transition to EMV.