Visa Wanted a Vast Empire. First, It Had to Beat Back Its Foes.
Visa is winning the decadeslong battle for control over how U.S. consumers pay for everything. It got here in part by paying for competition to go away and by using fees as weapons to make partners bend to its wishes.
One by one—as e-commerce exploded and Americans moved away from using cash—Visa has come up with strategies to keep financial and tech companies, including JPMorgan Chase, Apple, PayPal Holdings, Square and others from encroaching on its turf. All the while, it has steadily raked in a cut of many transactions done in this country—an arrangement that merchants and lawmakers have criticized for years.
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Last month, after more than three years investigating, the Justice Department filed an antitrust lawsuit against Visa that alleges it illegally monopolized the market for debit-card payments. Visa’s actions, the suit said, created higher fees for merchants that are passed on to consumers and set the U.S. payments system years behind the rest of the world. In a number of other countries, consumers often pay merchants directly from their bank accounts.
“Visa’s unlawful conduct affects not just the price of one thing—but the price of nearly everything,” Attorney General Merrick Garland said.
Visa says it is pro-competition, that it ignites and supports innovation and commerce. “Anyone who asserts anything to the contrary is just plain wrong and doesn’t understand our business,” it said in a statement. “We compete for every transaction, and we invest billions in our network each year for the benefit of partners, merchants, and consumers.”
The company has described the DOJ lawsuit as meritless and said, “we will defend ourselves vigorously.”
Visa’s approach wasn’t just for its debit-card operations; it also pushed to expand and protect its credit-card business, Wall Street Journal reporting shows. Its approach has shaped credit cards, fueling credit-card rewards as U.S. consumers know them.
This article is based on interviews with former Visa executives and current and former executives at companies that tangled with Visa. The Journal also reviewed partially unredacted court filings in a nearly two-decade-running lawsuit brought by merchants that alleges Visa, Mastercard and large U.S. card issuers restrict competition. In June, the judge presiding over that class-action case rejected a settlement that the networks and large banks recently reached with plaintiffs and said it was time for a trial.
Visa, based in San Francisco, has built its network over more than 60 years—going back to clunky manual credit-card readers and carbon-paper copies of receipts. It accounts for around 60% of the total dollar amount of U.S. debit-card purchases and about 50% of U.S. credit-card purchases, according to the Nilson Report, a trade publication. Its closest competitor, Mastercard, accounts for around 22% and 23%, respectively. Visa’s profit totaled $17.3 billion in its 2023 fiscal year, after more than tripling in the last decade.
As the largest card network in the U.S., Visa, and its competitor Mastercard, each set many of the fees and rules that the electronic-payments industry follows. Visa demands that merchants follow an “honor all cards” rule that requires stores that accept any one of its credit cards to accept all of them. The same is true for merchants that accept its debit cards. Mastercard has the same rules for its cards.
Picture what happens when a shopper taps or inserts their card at checkout. In the blink of an eye, Visa’s network transmits information about the transaction between the bank that issued the shopper’s card and the merchant’s bank—that data helps determine whether the purchase the consumer is trying to make will be approved. The information relayed includes the purchase amount, merchant location, date and time. The card issuer also factors in whether the consumer has enough of a spending limit left on the card to buy the item.
Each time a Visa card is used for a purchase, Visa takes a cut of the transaction—a so-called network fee that it pockets. Visa also sets a much larger “interchange” fee that merchants pay to the banks that issue credit cards. A similar arrangement is in place for debit cards, though those interchange fees were capped for large banks by federal law more than a decade ago.
As its commercials have said, Visa is “everywhere you want to be.”
Securing Costco
In 2014 Costco Wholesale was looking at making changes to the way its shoppers pay. For more than a decade, shoppers wanting to pay with a credit card in Costco stores could use only American Express to buy everything from mega-packs of paper towels to grass-fed organic steaks.
Visa wanted the deal. So did JPMorgan Chase, the country’s biggest credit-card issuer and a close Visa partner. Normally, Chase issues many of its debit and credit cards to run on Visa’s network, but with Costco the bank saw a chance to expand its own network. And if Costco chose Chase, it was likely that only Chase credit cards would have been accepted at the store, according to people familiar with the bank’s plan.
Chase “would be a VERY BAD outcome, and probably worse than an [Mastercard]-only acceptance,” wrote a Visa executive, according to people familiar with the matter and court documents from the merchants’ lawsuit reviewed by the Journal.
It would set a bad precedent, another Visa executive said, according to the people familiar with the matter and the court filings.
Visa offered to pay Costco $150 million. One condition of the deal: Costco would not do a credit-card deal with a bank that had its own network, according to the people familiar with the matter and the court filings. That shut out Chase. Visa also offered Costco an exclusive discount on the interchange fees the store pays when someone makes purchases with Visa credit cards.
Costco agreed to a deal. It would accept Visa cards and it partnered with network-less Citigroup for its credit card.
Chase launched an internal review on how it lost Costco and concluded it was outbid. It didn’t know about the Visa payment, according to people familiar with the matter.
Visa said it was “not aware” that Chase sought exclusive acceptance of Chase cards at Costco and that it didn’t prevent any party from participating in the bidding process. A Visa spokesman said, “It is categorically false that Visa attempted to advantage or disadvantage any one financial institution over another in its offer to Costco in 2015.”
‘Mutually-assured destruction’
In 2013 another threat was emerging: Apple. The tech giant was in the process of creating what would become Apple Pay.
Visa saw Apple Pay as an “existential threat” to its debit business and knew the tech giant had had conversations about avoiding the Visa and Mastercard networks, the DOJ lawsuit said. The card companies decided they needed to be involved in Apple Pay. An emergency meeting was called in a midtown New York law office where Visa and Mastercard executives met to figure out how to add cards onto Apple Pay, according to people familiar with the matter. Visa also has a contract with Apple as a merchant accepting its cards.
“Visa’s strategy has been to align its incentives with Apple, which Visa refers to as a ‘mutually assured destruction principle,’” the DOJ said. That is the name of a military strategy aimed to deter nuclear escalation. Visa would continue to work with Apple as long as Apple didn’t become a competitor, the DOJ said.
Apple agreed not to develop its own network to compete with Visa and Mastercard, the Journal previously reported. The DOJ suit said Apple agreed not to develop payment methods that compete against Visa.
“Visa does not have an agreement with Apple prohibiting them from developing a card network,” the Visa spokesman said.
Apple says it doesn’t have agreements with any Apple Pay issuers or payment networks that restrict its ability to innovate or to enter into new businesses.
Building a network in the U.S. would have been inconsistent with Apple’s vision, Apple said in a court document in a separate case.
A threat from PayPal
In 2016, Visa was closely watching PayPal, the online payment system that had just been spun off from eBay. The newly independent company was growing and encouraging users to pay directly from their bank accounts rather than debit or credit cards—and bypass Visa.
PayPal had become the “only major entity to successfully disintermediate Visa” in the U.S., a Visa executive said, according to the DOJ suit.
Visa’s board was discussing how PayPal’s model “was also suitable for enabling merchants of all types to provide simpler, faster card-based payments to their online consumers,” according to an excerpt from a 2016 Visa board document included in the merchants’ lawsuit court filings.
Visa’s chief executive at the time, Charlie Scharf, publicly said at a 2016 conference that PayPal needed to change its model, warning Visa would “compete with them in ways that people have never seen before.”
“If you are a foe, you’re not a friend,” Scharf said.
Visa threatened to impose higher charges on PayPal when consumers used Visa debit cards, the DOJ said. And it offered to lower the fees PayPal would incur when consumers loaded money onto the platform using Visa cards, according to people familiar with the matter.
PayPal agreed to steer customers away from making payments directly from their bank accounts. PayPal in prior public statements said the deal was meant to help it grow and that it did.
A Visa spokesman said the company wanted PayPal to treat its cards equally with other payment options. “We entered into a commercial agreement with PayPal which provided PayPal economic incentives for a range of different things.”
Putting Square on a ‘short leash’
When Congress passed the Dodd-Frank financial overhaul law in 2010, it included a section known as the Durbin Amendment. The law, in part, requires that debit cards be able to transmit on at least two networks that are unaffiliated with each other. So a Visa debit card would have to work on Visa’s network, but also at least one other, and a merchant could choose between which of the two networks to send transactions over.
After the law was passed, Visa rolled out a new fee for merchants accepting Visa cards. The DOJ in its lawsuit said such fees were used to force merchants into contracts that committed even more volume to Visa.
Visa was worried that Square, part of the company now known as Block, which handles payments for many merchants, was capturing a lot of small-business transactions and could direct sales volume away from Visa’s network, according to people familiar with the matter.
Facing potentially millions of dollars in such fees, Square complained to Visa. In a multiyear agreement in 2014, Visa gave Square a break on the fees for many purchases and Square agreed to give priority to sending Visa debit-card transactions through Visa instead of the other networks, according to the people and the merchants’ court documents.
Visa also gave fee concessions when Visa debit cards were used on Square’s Cash App, and Visa reserved its right to cancel this arrangement, according to the DOJ lawsuit. After signing the contract, a Visa executive allegedly stated, “we’ve got Square on a short leash.”
“Our discussions with Square in 2014 were not about concerns or risks it could pose to Visa,” the Visa spokesman said. “Quite the opposite. We worked with Square to create a partnership that would help them further grow acceptance and expand their business.”
The Plaid deal
Visa didn’t only play defense to protect its market dominance. In 2020, it struck a deal to acquire Plaid for $5.3 billion.
Plaid provides under-the-hood technology for financial and payments apps. Visa saw it as a platform that could one day allow consumers to make purchases directly from their bank accounts—again sidestepping Visa’s network.
At one point, a Visa executive doodled a picture of Plaid as an island volcano, warning colleagues that “[w]hat lies beneath, though, is a massive opportunity—one that threatens Visa,” according to a 2020 DOJ lawsuit.
The Justice Department in 2020 sued to block the deal on antitrust grounds and the companies walked away.
Now, the Plaid deal has come back to bite Visa. The DOJ probe that led to last month’s lawsuit started after investigators looking into the deal between Plaid and Visa began asking broader questions about Visa, according to people familiar with the matter.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com