By Brent Kendall and AnnaMaria Andriotis
The Justice Department filed an antitrust lawsuit Thursday that seeks to block Visa Inc.'s $5.3 billion deal to acquire Plaid Inc., a key player in the financial-technology space.
The department brought the case in a Northern California federal court, alleging the deal would eliminate the nascent but significant competitive threat that Plaid poses to Visa in the online debit market. The acquisition would allow Visa to unlawfully maintain a monopoly in online debit, leading to higher prices, less innovation and higher entry barriers for online debit services, the department alleged.
"If allowed to proceed, the acquisition would deprive American merchants and consumers of this innovative alternative to Visa," said Assistant Attorney General Makan Delrahim, the department's antitrust chief.
"American consumers and business owners increasingly buy and sell goods and services online, and Visa -- a monopolist in online debit service -- has extracted billions of dollars from those transactions," Mr. Delrahim said.
A Visa spokesman said the lawsuit is "legally flawed and contradicted by the facts...The combination of Visa and Plaid will deliver substantial benefits for consumers seeking access to a broader range of financial-related services, and Visa intends to defend the transaction vigorously."
"Visa's business faces intense competition from a variety of players -- but Plaid is not one of them," the spokesman added.
Plaid declined to comment.
The Justice Department had been scrutinizing the deal since early this year. The Wall Street Journal reported last week that the transaction was facing legal jeopardy, with the department making preparations for potential litigation.
The case comes as the department is placing more emphasis on antitrust scrutiny of the financial sector. Recent cases also show the department increasing its focus on protecting future competition, even in circumstances where two companies aren't currently major head-to-head rivals.
The lawsuit adds another major antitrust case to the department's portfolio. Last month, the department filed a long-awaited case against Alphabet Inc.'s Google , alleging the company was unlawfully preserving a monopoly in search and search advertising. Google denies the allegations.
Visa is the largest U.S. card network, accounting for the largest dollar amount of credit, debit and prepaid transactions. It accounted for about 70% of debit and prepaid transactions during the first half the year, according to the Nilson Report, a trade publication.
Online debit payments, meanwhile, have been growing during the coronavirus pandemic as more people shift to shopping from their homes rather than in stores.
Plaid provides the technological infrastructure underpinning an array of next-generation financial apps, including Venmo, the digital money-transfer service owned by PayPal Holdings Inc. It has been viewed by fintech companies and merchants as a platform that could one day enable consumers to make purchases without having to rely on debit and credit cards, instead allowing for payments to be made directly from a consumer's bank account to a merchant's account.
The San Francisco-based startup, which currently doesn't operate a payments network, has said it provides connections between more than 11,000 banks and financial-services companies and more than 200 million consumer accounts.
The Justice Department lawsuit alleges that Plaid is planning to create an alternative payments platform that wouldn't rely on debit cards -- or Visa's network. That new platform would mean lower costs for merchants, who could pass along their savings to consumers, the department said, adding that Plaid's existing connections to banks and consumers made it uniquely positioned to overcome barriers to entry in the payments space.
Visa's concerns about Plaid underpinned its decision to buy the company and pay a large revenue multiple for it, the lawsuit alleges. The government said Visa's CEO described the deal as an "insurance policy" to neutralize a threat to the company's debit business. The lawsuit quoted another executive who in 2019 compared Plaid to an island "volcano" whose current capabilities are just "the tip showing above the water" and warned that "[w]hat lies beneath, though, is a massive opportunity -- one that threatens Visa."
The executive allegedly drew a picture of this financial volcano, which the department included in its legal complaint.
As part of its research on Plaid, Visa learned that the startup had plans to roll out a money-movement business by the end of 2021, according to the lawsuit. Plaid also considered charging merchants significantly less for certain components of its payment service than they pay to accept debit cards, the Justice Department said.
The lawsuit distinguishes between the two largest U.S. card networks that have long dominated payments. It says that Mastercard Inc., Visa's only longstanding rival in online debit-card payments, has a much smaller share of that market, hasn't gained significant share from Visa and hasn't restrained Visa's monopoly. Visa has long-term contracts with many of the largest banks that restrict their ability to issue Mastercard debit cards, the lawsuit alleges, and it also has set up barriers that prevent rivals from growing their online debit share.
Members of Congress asked the Federal Reserve in a letter this summer to look into whether the card networks and debit-card issuers are limiting competition in online payments. Sen. Richard Durbin and Rep. Peter Welch, both Democrats, said in their letter that such practices could force merchants to pay fees they can't afford. Separately, the Federal Trade Commission is investigating Visa and Mastercard's debit-card practices.
The Electronic Payments Coalition, which represents card companies including Visa and Mastercard, said at the time that the companies were adhering to debit marketplace rules and that their online payment capabilities were helping small businesses to stay open during the pandemic.
Write to Brent Kendall at email@example.com and AnnaMaria Andriotis at firstname.lastname@example.org
(END) Dow Jones Newswires