Visa is a towering figure in the global payments industry, processing billions of transactions each year. Over the past two decades, the company has achieved remarkable success in growing its transaction volume by 21-fold, creating a system that has become integral to commerce across the world. It is important to recognize Visa’s role as a pioneer in innovation, particularly in areas such as security, fraud detection, tokenization, and contactless payments. Visa’s scale and efficiencies have allowed it to build a global infrastructure that is reliable, secure, and trusted by millions of merchants and consumers. 

However, this massive growth has not led to a proportional reduction in the cost of transactions for merchants and consumers. In fact, Visa’s revenue per transaction has increased slightly, defying the typical economic forces that drive costs down as scale increases. Visa made $0.10 to $0.11 per transaction in 2000–2001, and today, it makes $0.12 per transaction despite processing 21 times more transactions. This pricing stability, if not slight increase, in the face of overwhelming growth is a rare occurrence in a competitive market. 

The table below highlights Visa’s Revenue per Transaction over the years, demonstrating how Visa’s pricing has remained relatively constant or increased slightly, despite the massive scale achieved:

Visa’s “Moat” and Its Impact on the Market 

Visa has effectively created a “moat” around its business. This moat is supported by: 

• Network effects: The more merchants and consumers use Visa, the more valuable its network becomes, which discourages migration to other systems.
• Regulatory barriers: The payments space is heavily regulated, and this complexity creates high barriers to entry for new competitors.
• Scale efficiencies: Visa’s global infrastructure benefits from tremendous economies of scale, making it challenging for smaller or emerging networks to compete on the same level.
• Exclusionary practices: According to the DOJ’s recent lawsuit, Visa has insulated itself from competition by imposing exclusionary agreements on merchants and banks, effectively penalizing them for routing transactions through competing debit networks. 

These factors have allowed Visa to maintain its dominant market position and increase its pricing power over time, despite achieving massive scale and efficiencies. Visa has consistently implemented well-documented price increases on its network fees over the years, further burdening the merchant community. These increases have persisted despite Visa benefiting from substantial economies of scale, which should have ideally led to reduced costs for merchants rather than higher fees. 

In light of these anticompetitive practices, the Credit Card Competition Act has emerged as another crucial legislative effort aimed at promoting competition in the payments ecosystem. The act seeks to require merchants to have at least two unaffiliated networks to choose from when routing credit card transactions, thereby loosening the stranglehold Visa and Mastercard currently have on the market. By increasing routing options, the act would empower merchants to route transactions through lower-cost networks, fostering competition and potentially reducing interchange fees. This initiative complements the DOJ’s antitrust lawsuit by targeting the same core issue: Visa and Mastercard’s duopoly and their ability to dictate terms that disadvantage both merchants and consumers. If passed, the Credit Card Competition Act could be a significant step toward breaking down the barriers to competition that Visa has erected over the years. 

The DOJ Lawsuit and Anticompetitive Practices 

The recent antitrust lawsuit filed by the Department of Justice against Visa addresses many of the concerns that arise from Visa’s dominance in the market. According to the DOJ, Visa has illegally maintained a monopoly over debit network markets by engaging in exclusionary agreements that penalize merchants and banks for routing transactions through competing networks. These agreements stifle competition and innovation, forcing merchants to pay higher fees than they would in a competitive market. 

More than 60% of debit transactions in the U.S. run on Visa’s network, generating over $7 billion in fees annually. The DOJ argues that Visa’s conduct limits competition, raises prices for consumers, and reduces opportunities for new, innovative players to enter the market. As Attorney General Merrick B. Garland stated, Visa’s actions impact “the price of nearly everything” since debit transactions are integral to daily commerce. 

Acknowledging Visa’s Contributions 

It is important to acknowledge Visa’s significant contributions to the payments ecosystem. Visa has been a leader in innovating secure and efficient transaction systems, from tokenization to contactless payments. These advancements have enhanced the consumer experience and made global commerce more seamless. Visa has also been instrumental in developing fraud detection systems, which have saved merchants and consumers billions in fraud-related costs. 

However, these innovations and achievements do not absolve Visa from the responsibility to foster a more competitive environment. In fact, Visa’s dominance in the market should serve as a call for greater scrutiny and regulation to ensure that such market power is not abused to stifle competition. 

The Economics of Visa’s Dominance 

In competitive markets, when companies achieve scale, unit economics tend to fall. Lower prices per unit are passed on to consumers as companies optimize their operations. Yet, Visa’s revenue per transaction has increased slightly over the past 25 years, despite a 21-fold increase in transaction volume. This is a red flag in terms of competition. 

Visa’s ability to maintain or even slightly increase its revenue per transaction suggests that market forces are not driving prices down. This lack of competitive pressure can largely be attributed to Visa’s duopolistic position in the marketplace, where it, along with Mastercard, has little to no threat from smaller competitors. 

Why Regulation is Necessary 

Visa operates in an industry that is capital intensive, heavily regulated, and reliant on network effects. These characteristics create a system where barriers to entry are high, competition is stifled, and the market becomes increasingly insulated from new players. While Visa’s contributions to innovation are undeniable, its current pricing practices and market dominance require government intervention to prevent the abuse of market power. 

The following graph illustrates how a typical Retail Merchant Effective Rate (%), which incorporates interchange fees, network fees, and acquiring fees, has evolved over time. Despite significant growth in transaction volumes and innovations in the payments space, the graph shows a troubling upward trend in costs for merchants.  

Source: Optimized Payments Harmonize Analytics Using Data from Retail Merchants Processing $100M+ in Card Payments Annually

Several key drivers are evident in this trend: 

• The Durbin Amendment initially lowered the effective rate by capping regulated debit interchange fees, providing some relief to merchants.
• However, over time, issuers shifted towards more expensive card types, and network fees continued to rise, reversing the cost-saving effects of the Durbin Amendment.

• The COVID stimulus temporarily reduced effective cost to higher debit usage.

• However, given recent rate increases—combined with a shift from debit to credit cards due to inflation—have led to a sharp rise in merchant costs in 2021 and 2022. 

 The DOJ’s lawsuit is a critical first step in addressing Visa’s anticompetitive behavior in the debit market, but it is not enough. The Credit Card Competition Act, which aims to increase routing options for merchants, also shows promise in addressing the lack of competition in the credit card space. These legislative and legal actions are necessary to open Visa’s moat and create a more competitive environment for both debit and credit networks. 

Regulatory Actions Should Focus on Three Key Areas: 

1. Ensuring Competitive Routing: Merchants should have more freedom to route transactions through networks that offer the best pricing and service, without fear of penalties or exclusionary practices.

    

2. Lowering Interchange Fees: With more competition, interchange fees would naturally decline, reducing costs for merchants. These savings could be passed on to consumers in the form of lower prices, benefiting the broader economy

    

3. Encouraging Innovation Through Competition: Regulation should not only aim to break down Visa’s dominant position but also foster an environment where new entrants can bring fresh, innovative payment solutions to market. Fintech companies, smaller debit networks, and alternative payment systems should be given the space to compete fairly. 

Conclusion: A Call for Regulatory Reform 

Visa’s growth and success are a testament to its innovative capabilities and its role in shaping the global payments landscape. However, this same success has also led to market practices that are not conducive to competition. By maintaining or increasing its revenue per transaction over the last two decades, Visa has demonstrated that it can wield its market power to keep prices high, despite the efficiencies gained from scale. 

The DOJ’s lawsuit and the broader regulatory push to foster competition in the payments space represent a pivotal moment for the industry. It is time to open Visa’s moat, reduce its pricing power, and foster an environment where new competitors can thrive. Regulation is not meant to punish success—it is meant to ensure that success does not come at the cost of a healthy, competitive market. 

The payments industry should be one that encourages innovation, lowers costs for merchants and consumers, and provides opportunities for new players. Only through targeted regulatory intervention can we achieve this vision since market forces clearly have not worked.