Visa Inc. finds itself under renewed scrutiny from the US Justice Department (DOJ) as the agency intensifies its investigation into the company’s merchant charging practices related to its proprietary “tokenization” technology. The probe has triggered concerns about potential antitrust violations and monopoly tendencies within the payment industry.
The ongoing DOJ inquiry, part of a long-standing investigation, delves into policies of Visa that impose higher charges on retailers who opt out of using the company’s tokenization technology, according to sources familiar with the matter. Tokenization, a security-focused service introduced by Visa in 2014, substitutes sensitive card numbers with tokens, enhancing the security of payment transactions by rendering tokens device-specific or merchant-specific.
This renewed interest from the Justice Department comes more than two years after it initially alerted Visa about an antitrust investigation into its practices. The move follows closely on the heels of rival Mastercard Inc.’s resolution of a similar case involving its own tokenization policies. The DOJ, acting under the Sherman Antitrust Act, has issued a series of civil investigative demands this year, aiming to curb monopolistic behaviors.
When reached for comment, both Visa and the Justice Department declined to provide statements regarding the ongoing investigation.
Shares of Visa, which have experienced a 16% surge in value this year, remained relatively stable at $240.32 as of 9:44 a.m. in New York.
Tokenization, a pivotal innovation introduced by Visa in 2014, involves substituting the conventional 16-digit account number with a unique token. This token, unlockable solely by Visa, ensures the security of cardholder information during exchanges between retailers and financial institutions. Since its inception, Visa has issued over 4 billion tokens, with more than 13,000 merchants, including major entities like Netflix Inc., Microsoft Corp., and Alphabet Inc.’s Fitbit, adopting the technology.
Visa’s strategy has long been to incentivize merchants to adopt its tokenization service by offering reduced charges. The company’s push for widespread tokenization hinges on the significant security enhancements it offers to the payment process. Besides bolstering security, tokenization streamlines payments by enabling financial institutions to automatically update compromised or expired payment credentials, eliminating the need for manual customer interventions.
In recent weeks, Visa, in collaboration with its partners, announced impending adjustments to its fee structure. A document obtained by Bloomberg News revealed that these modifications contributed to rekindling the Justice Department’s interest in tokenization. Notably, the revisions include differential rates for tokenized and non-tokenized payments. For example, beginning in April, prominent merchants imposing recurring charges, such as streaming services and cable-television providers, will pay $1.38 in card fees per $100 in traditional Visa card purchases. However, this fee drops to $1.28 when using Visa’s tokenization technology.
While seemingly minute on a per-transaction basis, these adjustments carry cumulative implications. Merchants’ expenditures on swipe fees, totaling a record $160.7 billion in the past year, have surged nearly 17% since 2021, as reported by the Nilson Report. Although Visa and Mastercard dictate these rates, it’s the card-issuing banks that reap the majority of the revenue.
Visa’s rivals have also encountered regulatory scrutiny in the realm of tokenization. The Federal Trade Commission (FTC) settled with Mastercard in December, addressing allegations that the company leveraged its tokenization technology to inhibit merchants from utilizing alternative payment networks. The FTC’s involvement is rooted in the Durbin Amendment of the Dodd-Frank law, which mandates multiple competing networks on debit cards.
In contrast, Visa has, according to a knowledgeable source, long granted alternative networks access to pertinent information. The ongoing DOJ probe into Visa’s practices revolves around potential antitrust violations, with a particular focus on whether the company has attempted to monopolize the debit-card market.
This intensified scrutiny by DOJ follows a prior instance where tokenization service of Visa became a point of contention. In 2020, the company’s proposed acquisition of financial-technology provider Plaid Inc. was met with DOJ opposition, leading to the deal’s abandonment. The DOJ identified the tokenization service of Visa as a potential obstruction, allegedly limiting competitors from offering viable online debit-card transaction alternatives.
In the aftermath of the failed acquisition, Visa became subject to a separate investigation, with the DOJ issuing civil investigative demands for documents and information related to the company’s US debit practices and competition within the payment industry. Throughout the ongoing investigation, Visa has expressed its commitment to cooperating fully with the DOJ.
Source: Bloomberg
