Discover Suit Targets Visa Strategies

Nov. 26, 2014 4:58 p.m. ET

Sterne, Agee & Leach

Discover Financial Services’ argument that Visa’s debit practices are anti-competitive would imply merchants are paying higher prices for debit-card transactions, which is not the case.

Late Tuesday, Discover (ticker: DFS DFS -0.56626874808693% Discover Financial Services U.S.: NYSE USD64.97 -0.37 -0.56626874808693% /Date(1417039240177-0600)/ Volume (Delayed 15m) : 2072413 AFTER HOURS USD64.976 0.00600000000000023 0.009235031553024473% Volume (Delayed 15m) : 27326 P/E Ratio 12.328273244781784 Market Cap 29462596867.3462 Dividend Yield 1.4776050484839156% Rev. per Employee 677449 More quote details and news » ) sued Visa ( V), alleging anticompetitive practices Visa has undertaken in the debit-card business.

The history of this lawsuit is tied to Visa implementing new strategies to stem market-share losses in the debit-card space following new Durbin amendment mandate routing rules, which went into effect April 2012. Visa’s Interlink personal identification number (PIN) debit network lost 54% of its volume in the subsequent quarter with MasterCard’s ( MA MA 0.2548065786425759% MasterCard Inc. Cl A U.S.: NYSE USD86.56 0.22 0.2548065786425759% /Date(1417039432722-0600)/ Volume (Delayed 15m) : 3162237 AFTER HOURS USD86.56 % Volume (Delayed 15m) : 165981 P/E Ratio 29.542662116040955 Market Cap 99791114641.3192 Dividend Yield 0.5083179297597042% Rev. per Employee 1119630 More quote details and news » ) Maestro unit the largest beneficiary. Other electronic funds transfer (EFT) networks, including Discover, were also beneficiaries from the new mandated rules for two unaffiliated networks on each debit card (one network for Signature, one unaffiliated network for PIN).

To minimize the impact from these new debit rules, Visa implemented FANF and re-introduced PAVD. FANF, or Fixed Acquirer Network Fee, is a volume-based pricing strategy that offers economic incentives to merchants for directing more debit volume to Visa regardless of how the debit transaction is authenticated (PIN versus Signature). PAVD, or PIN-Authenticated Visa Debit, is a technology that allows PIN-authenticated debit transactions to process over Visa’s Signature debit network (VisaNet).

Discover is alleging these Visa practices are anti-competitive. Of note, the Department of Justice (DOJ) launched an investigation into both FANF and PAVD back in March 2012, although there has not been any material action since that time. Discover has been a proponent of the DOJ’s investigation and by filing this lawsuit, Discover appears to be implying they are no longer willing to wait for the federal government to complete its investigation.

Following the Durbin amendment, competition became fierce between the networks and various EFT networks to win volume from merchants who now controlled routing. The primary basis for this competition was the net cost of acceptance. Visa pricing strategies are effectively bundled pricing, which puts downward pressure on prices, consistent with what is seen in competitive markets.

Of note, the competition for merchant volume was particularly fierce among the top 60 retailers, who alone accounted for 70% of PIN-debit volume before Durbin amendment routing rules went into effect. In a report industry consultancy First Annapolis penned on this topic: “These network innovations should further enhance the level of competition for debit transactions at the merchant level.” The network enhancements referred to included Visa’s PAVD innovation.

— Thomas C. McCrohan
— Leonard DeProspo

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