Why Visa's antitrust battle could be so worrying to Wall Street

 Visa's stock falls as Justice Department launches suit, and an analyst notes there are more potential alternatives to Visa's debit network in the event the company is penalized

Visa Inc.'s stock was among the worst performers in the S&P 500 on Tuesday and flirted with its steepest percentage drop in nearly three years.

Investors' worries reflect a Justice Department lawsuit filed Tuesday, which said Visa (V) has acted anticompetitively in the debit-card market.

"Visa deploys a web of unlawful anticompetitive agreements to penalize merchants and banks for using competing payment networks," Attorney General Merrick Garland said in an announcement. "At the same time, it coerces would-be market entrants into unlawful agreements not to compete by threatening high fees if they do not cooperate, and promising big payoffs."

In a release, he further criticized Visa's fees. "Merchants and banks pass along those costs to consumers, either by raising prices or reducing quality or service," he said. "As a result, Visa's unlawful conduct affects not just the price of one thing - but the price of nearly everything."

Visa called the suit "meritless" and vowed to fight it.

"Anyone who has bought something online, or checked out at a store, knows there is an ever-expanding universe of companies offering new ways to pay for goods and services," Julie Rottenberg, Visa's general counsel, said in a statement. "Today's lawsuit ignores the reality that Visa is just one of many competitors in a debit space that is growing, with entrants who are thriving."

Investor fears began to surface late Monday when a Bloomberg News report said that the Justice Department was readying an antitrust case against the payment-technology giant.

Shares of Visa were already down more than 4% prior to the official filing and fell further after the start of Garland's press conference. The stock ended the day down 5.5%, its worst one-day drop since a 6.9% fall on Oct. 27, 2021.

It remains unclear what the exact implications would be if the government is successful in its efforts.

In an interview before the official lawsuit was filed, Mizuho analyst Dan Dolev told MarketWatch that the Justice Department's interest in Visa's debut business is "not surprising, but not good either."

One factor likely worrying investors Tuesday is that the payments landscape is different than it was even five years ago. Then, there were few viable payment options beyond the card networks. But now there are more ways to make transactions, including the Federal Reserve's FedNow offering, a real-time payment service that lets people and businesses send money between accounts.

"The difference between then and now is you've got alternatives to debit," Dolev said. Not only does FedNow have more than 900 financial institutions signed up, but companies are working on their own ways of bypassing the card networks. For instance, Walmart Inc. (WMT) is planning an instant option that would let people pay straight from their bank accounts.

Bernstein analyst Harshita Rawat wrote last week that "pay-by-bank on Walmart itself is not a big deal," but "the growing prevalence of pay-by-bank solutions is a key disruptive risk" for Visa and Mastercard Inc. (MA) Walmart is working with Fiserv Inc. (FI) on the pay-by-bank option.

But Citi's Andrew Schmidt saw the heightened competitive landscape as a potential positive for Visa. The company "likely has a reasonable argument for increasing debit-market competitiveness given Mastercard debit portfolio wins (e.g., Citizens), Reg II clarifications that support [e-commerce] routing over alternative networks (e.g., STAR from Fiserv), and increasing availability of account-to-account payments," he wrote in a note to clients Tuesday morning, ahead of the official filing.

"However, there is likely to be an incremental regulatory overhang for [Visa], and developments may stretch out with variable outcomes," Schmidt continued.

Visa has been in regulatory crosshairs before, and Bloomberg linked the potential Justice Department case to the agency's past review of Visa's attempt to acquire Plaid, a company making technology that connects people's bank accounts to fintech platforms. The Justice Department opposed that planned merger, and Visa and Plaid ultimately called off the deal.

At the time Visa called off the merger plans with Plaid in 2021, Visa said it was confident it would have won a lawsuit but wanted to avoid a prolonged legal battle.

But it's not clear what would've happened had the parties duked it out in court. The 2020 complaint from the Justice Department was "very damning," Dolev said Tuesday.

https://www.morningstar.com/news/marketwatch/20240924697/why-visas-antitrust-battle-could-be-so-worrying-to-wall-street