The US Department of Justice (DOJ) is pursuing civil action against Visa, alleging the credit card giant has used its “size, scale, and centrality to the debit transaction ecosystem” to lock out competitors, assert its dominance over the debit payments network, and charge excessive transaction fees to customers.

In a filing to a New York district court, the DOJ asserted that Visa has aggressively pursued its monopoly over the US’s debit network market, using its dominance “to thwart the growth of its existing competitors and prevent others from developing new and innovative alternatives”.

According to Attorney General Merrick Garland, Visa’s “unlawful” amassing of market power has enabled it to “extract fees that far exceed what it could charge in a competitive market”.

For instance, the DOJ contends that Visa has imposed “a web of exclusionary agreements” on its merchant and bank customers, penalising those that opt to route transactions to a different, potentially less expensive or more innovative, debit network or alternative payment system.

“In so doing, the complaint alleges, Visa locks up debit volume, insulates itself from competition, and smothers smaller, lower-priced competitors,” the DOJ wrote.

As a carrot to would-be competitors, Visa would invite potential fintech rivals to become partners rather than entering the market as competitors by “offering generous monetary incentives”.

Complementing this carrot approach, Visa would use the stick of “punitive” additional fees to dissuade their potential competitors’ innovation, were they to develop competing products.

Visa, ultimately, would profit from this forced monopoly position by collecting a higher fraction of each debit transaction – fees that are ultimately passed down to customers – than it would if it faced competition.

Visa’s interchange rates for debit cards can range from 0.05% plus US$.22 (AU$0.32) for basic regulated institution debit transactions, to 1.65% plus $.10 (AU$0.15) for non-regulated institution basic e-commerce transaction.

On average, the Federal Reserve, calculates that the average fee per debit card transaction is US$0.44 (AU$0.64).

“Collectively,” the DOJ wrote in its filing, “Visa’s systematic efforts to limit competition for debit transactions have resulted in significant additional fees imposed on American consumers and businesses and slowed innovation in the debit payments ecosystem.”

Visa’s debit rails command more than 60 per cent of all debit transactions, and 65 per cent of card-not-present debit payments in the US.

The payments giant collects around US$7 billion (AU$10.2) in fees each year for processing these transactions, according to the DOJ, which is more than the revenue it earns from its credit business.

While Visa’s operating margins run at around 83 per cent, “these numbers understate Visa’s monopoly power over debit transactions”, the DOJ said.

Sighting internal documents from the payments giant, the DOJ said the company “feared a future where newer, better, or cheaper alternatives would force Visa to compete harder to win customers’ business or, worse, displace Visa with alternatives to its debit network”.

In particular, Visa, according to the DOJ, feared that some technology companies and fintech startups with “network ambitions” would cut it out as the middleman between merchants, consumers, and their banks by offering a better or cheaper payment product.

Visa aimed to stymie that development by entering into agreements to pay potential competitors to partner rather than innovate.

“As Visa’s then-CFO put it: ‘Everybody is a friend and partner. Nobody is a competitor,’ the DOJ wrote.

“Without intervention, Visa will continue to insulate itself from competition and subvert the competitive process in this essential industry that fuels US commerce, all the while enriching itself at the expense of the American people who ultimately bear the brunt of Visa’s unlawful monopoly and the lack of competition its conduct has wrought.

In 2020, the Justice Department filed a civil antitrust lawsuit to stop Visa from acquiring Plaid, a technology company that powers fintech apps developing disruptive options for online debit payments. The companies subsequently abandoned their planned $5.3 billion merger.

The DOJ said its lawsuit “seeks to restore competition to this vital market on behalf of the American public”.

“Anticompetitive conduct by corporations like Visa leaves the American people and our entire economy worse off,” said Principal Deputy Associate Attorney General Benjamin Mizer.

“Today’s action against Visa reminds those who would stifle competition rather than competing on price or investing in innovation that the Justice Department will never hesitate to enforce the law on behalf of the American people.”

The DOJ’s case will target Visa’s alleged violation of the Sherman Act, relating to unlawful monopolisation of the debit network and anti-competition agreements with prospective competitors.