If you claim that you want competition in the fintech sector, then you need to open up your market.

The Biden administration's antitrust strategy has primarily spotlighted major tech giants like Meta, Google, and Amazon. Still, it has recently turned its gaze towards a more traditional player in the financial sector: Visa. This fall, the Justice Department initiated a significant antitrust lawsuit against Visa, alleging that the company wields excessive control over the U.S. debit card market, which commands over 60% of transactions. 

The DOJ contends that Visa maintains this dominance through a series of anti-competitive contracts with banks, merchants, and fintech companies, ultimately limiting the growth of competitors and discouraging the development of innovative alternatives.

However, the government’s calls for competition and innovation within the payment technology landscape ring somewhat hollow, particularly when examining the government's own role in creating barriers to alternative payment solutions. The Justice Department's current claims may overlook how its past interventions have inadvertently fostered the conditions it seeks to rectify.

The intricacies of the DOJ's case involve the Durbin Amendment, a provision of the Dodd-Frank Act, which caps the processing fees—known as interchange fees—that debit card-issuing banks charge merchants for transactions. The Durbin Amendment also mandates that debit cards support transactions over at least two different networks, theoretically ensuring a more level playing field for alternative networks. 

To grasp the implications of this routing requirement, consider the design of a standard debit card. Beyond the logos of the issuing bank or credit union, most cards feature the logo of a dominant payment network like Visa or Mastercard. In compliance with the Durbin Amendment, these cards are also required to support payments through less prominent "back-of-card" networks, which may be illustrated by additional logos on the card’s reverse side.

The DOJ claims that Visa undermines these secondary networks through restrictive contracts with banks and acquirers, thereby discouraging the use of these alternative routing options. Despite presenting a seemingly pro-competitive stance, the Durbin Amendment’s stipulations highlight a fundamental misunderstanding of the payment card market, which operates as a two-sided network reliant on a critical mass of both consumers and merchants.

Achieving this balance is no small challenge; it necessitates substantial investment in secure technology and marketing efforts to attract users on both sides of the transaction. The issue with the Durbin Amendment is that it allows back-of-card networks to benefit from the investments and brand loyalty established by front-of-card networks. 

For instance, a front-of-card network may earn its position by providing robust security features that build consumer trust. This network must then recoup its costs through merchant fees, while the alternative networks gain the advantage of this trust without having to invest similarly.

Ultimately, if the government wishes to truly promote competition and innovation in the payments landscape, it must critically reassess its existing policies rather than simply pursuing actions against established players like Visa.