HOUSTON (CN) – Visa monopolizes the U.S. market for debit card services, stifling competition that would reduce fees for business owners and consumers, a rival claims in a federal antitrust lawsuit.
PULSE Network, a subsidiary of Discover Financial Services, sued Visa on Tuesday, seeking punitive damages and an injunction against rules Visa has imposed on banks and merchants to maintain its alleged corner on the debit services market.
Houston-based PULSE says most of its business comes from PIN debit network services.
“In the four quarters ending June 30, 2014, PULSE processed 4.2 billion transactions with a total dollar volume of approximately $163 billion,” the complaint states.
Though substantial, that was just a fraction of the 93.9 billion transactions totaling $7.2 trillion that Visa processed in the same time period.
The two types of debit card networks commonly used in the United States are “PIN” debit and “signature” debit, according to the complaint.
“In countries outside of the United States, signature debit networks have been deemphasized. The reason is that fraud rates are substantially higher for signature debit than for PIN debit, largely because PIN authentication is more secure than a signature,” the complaint states.
PULSE claims that despite the advantages of the PIN system, most debit card transactions in the United States are processed on a signature network because Visa rigged it that way.
“Visa acquired its debit network services monopoly during the 1990s by requiring merchants that accepted Visa credit cards also to accept Visa signature debit cards,” the complaint states.
Since merchants were unwilling to stop accepting Visa cards, the “tying arrangement” meant most would accept Visa’s signature debit network, PULSE says.
“Visa used this power over merchants to put in place a pricing structure in which merchants paid high fees to financial institutions that issued Visa signature debit cards, which in turn created strong incentives for issuers to focus on incentivizing use of Visa signature debit by cardholders,” the complaint states.
Business owners filed an antitrust lawsuit against Visa over the arrangement in 2003, which ended with the Foster City, Calif.-based company paying a multibillion-dollar settlement. (In re Visa Check/MasterMoney Antitrust Litig., 2003 WL 1712568 (E.D.N.Y. 2003).)
Visa also “imposed a rule” in the 1990s that prohibited banks from issuing signature debit cards on rival’s networks, PULSE says.
The mandate brought on a lawsuit by the federal government, and was found to violate antitrust laws, but the legal setbacks did not slow Visa down, PULSE claims.
By 2004, PULSE says, Visa was on more than 70 percent of the debit cards in the United States.
Visa then negotiated deals with banks that “resulted in Visa’s affiliated PIN debit network, Interlink, obtaining sole placement as a PIN debit network on a substantial number of Visa signature debit cards,” according to the complaint.
That prompted action from Congress, which placed provisions in the Dodd-Frank Act that required banks to include at least two unaffiliated networks on every debit card, and gave business owners the choice to route their debit card transactions to any network they preferred.
PULSE claims the law hurt Visa’s bottom line, as the company began losing transaction volume on its Interlink PIN debit network.
In response, PULSE says, Visa again used its market share to tilt the playing field. It made banks include the Visa PIN network option on every Visa card, and imposed network fees on merchants. If merchants refuse to pay the network fees they are no longer allowed to accept Visa cards.
Given the large number of consumers who have Visa debit cards, PULSE says, it is not practical for business owners not to accept Visa cards, and they have no choice but to pony up the fees.
“Visa’s actions have resulted in higher profits for Visa, higher prices charged to merchants, acquirers, and issuers, higher prices for consumers, and less debit network volume and reduced competitive viability for rival PIN debit networks, including PULSE,” according to the complaint.
An acquirer is a bank that processes debit card transactions.
PULSE lays out its case in painstaking detail in the 93-page complaint.
It seeks punitive damages for tortious interference and violations of the Sherman Act and the Texas Free Enterprise and Antitrust Act.
It also seeks an injunction against Visa’s allegedly illegal policies and compensation for lost profits it attributes to those policies.
PULSE is represented by David Beck with Beck Redden of Houston.
A Visa spokesman said: “Visa is currently reviewing the complaint. We have no other comment at this time.”