Of VISA and Volcanoes

A glimpse of antitrust under Biden.

Number of the Week: Just shy of $1 trillion (explanation below)

Of VISA, Volcanoes and Antitrust

It wasn’t a huge surprise when, on Thursday, the Department of Justice announced that it intends to block payments colossus VISA from buying fintech startup Plaid, a deal valued at $5.3 billion when it was announced in January. After all, back in August Justice’s antitrust chief Makan Delrahim said in a public speech that DOJ was examining VISA-Plaid. Then, in late October, the Wall Street Journal reported that DOJ had taken the unusual step of issuing a civil subpoena to Bain&Co, demanding documents Bain had obtained while consulting for VISA.

DOJ’s argument is very straightforward: VISA is already a payments monopoly (70% control of the online debits market, plus a ton of other scary anticompetitive stuff it does), and gobbling up Plaid would allow VISA to remove a competitor that threatens its business. The charge echoes the “copy-acquire-kill” tactic that Facebook critics complain about. Of course, DOJ doesn’t always succeed in blocking deals, but the episode is worth examining for several reasons.

First reason: fintech acquisitions are clearly in Justice’s crosshairs. Part of the explosion of the American fintech business in recent years is attributable to casual regulation. Because many fintech offerings don’t involve traditional banking products (such as paper checking accounts), they are not scrutinized at the same level as banks and other lenders. Financial oversight agencies like the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Trade Commission (FTC) and Consumer Finance Protection Bureau don’t eyeball fintech companies all that hard.

Justice seems determined to avoid that category. It’s been reported that, in addition to VISA-Plaid, DOJ is investigating Intuit’s $7.1 billion acquisition of the personal-finance service Credit Karma, and Mastercard’s $1 billion deal with the financial data aggregator Finicity.

Closely related is that Justice firmly maintains that fintech is a market disruptor. There is a fintech skeptic thesis out there (to which I partially subscribe) arguing that the new breed of startups, for all their market posturing, don’t want the big financial incumbents to go away or even get dinged too harshly. At least officially, DOJ is having none of that. Because Plaid provides the engine beneath the hoods of Venmo, Betterment, and others, DOJ asserts that “Plaid is uniquely positioned to surmount [market] entry barriers and undermine Visa’s monopoly in online debit services.” DOJ explicitly states that Plaid is positioned to drive down customer prices in a way that much older and larger competitors, such as Mastercard, haven’t—which is a little amazing if you stop to think about it.

Justice bases this view on damning material it pried out of VISA. Reading the DOJ complaint, you can almost hear the lawyers cackling over some of the documents they got their hands on. One VISA corporate development executive in a meeting likened Plaid to an island volcano, in which the Plaid services above the water line—such as account validation and payment confirmation—hid much larger Plaid capabilities that ultimately threaten VISA’s business. “I don’t want to be IBM to their Microsoft,” this executive said.

Later, when Plaid became a clear acquisition target, VISA’s CEO described the purchase as an “insurance policy to protect our debit biz in the US.” (I’ve read a few of these antitrust filings over, oh, 30 years, and it’s rare to have such a steaming pistol from the CEO.)

A third takeaway is that fintech antitrust pressure is not going to let up in a Biden Administration. A casual news reader could be forgiven for perceiving that antitrust enforcement has gone up under Trump, if only because a few headline-blasted cases have gone after big media companies—such as Time Warner and Google—that Trump denounced as enemies. Actually, the Trump Administration’s antitrust enforcement has been as lax as every Republican administration has been since Ronald Reagan. (On the broader question of financial deregulation, the New York Times this week published a useful roundup of all the ways Trump reduced oversight of the financial industry.)

Here are supporting points: Two yardsticks by which legal analysts measure antitrust enforcement are “second requests” (discovery procedures from the FTC and DOJ) and challenges for mergers that are reportable under the Hart-Scott-Rodino law. Predictably, these measures go up under Democratic administrations and down under Republican administrations, and under Trump (as of early 2020), both were down by more than 18% from Obama’s reign. Moreover, between 2017 and early 2020, the largest tech companies in America—Amazon, Apple, Facebook, Google, and Microsoft—acquired approximately 130 companies and not one was challenged by the Trump Administration. For these reasons, the antitrust pursuit of fintech deals under Trump stands out starkly.

Biden may not be an antitrust warrior, and there is reason to think that his appointees will continue to encourage the growth of digital financial services. But on antitrust, it is a safe bet that his DOJ will at least return to Obama levels of enforcement. In a 2019 interview, Biden expressed a willingness to break up Facebook, and several of his closest Capitol Hill colleagues have been banging the antitrust drum louder in recent years.

And finally, DOJ heat makes fintech exits trickier. You can’t blame the average fintech founder, after years of hard work, for wanting to sell her business to the likes of VISA. But if those options are curtailed, founders—especially those backed by venture capitalists eager to cash in on their investment—will increasingly look elsewhere, perhaps to an IPO. Aptly or ironically, this would create the very scrutiny (via the markets and the Securities and Exchange Commission) that some fintech firms have tried so hard to avoid.

Logocentrism

Returning readers may have noticed the snazzy new logo that sits atop this week’s newsletter. It is the excellent work of Nicole Dudka; I highly recommend her for any design needs readers may have.

FINvestments

🦈Number of the Week: In the earnings call this week for PayPal, an executive said that the firm is on track this year to handle just shy of $1 trillion in transactions. Last year it was $712 billion; just eyeballing previous year-on-year PayPal growth, I’d estimate that COVID created some $100 billion of transactions for this one company.

🦈Keep your eye on Starling, a British challenger bank that this week announced plans to raise another 200 million pounds (and which also received 100 million pounds in state aid, which is common for UK fintech firms). It has grown to nearly 2 million customers in three years, it’s one of the few British challenger banks to grow during the pandemic, and its quirky founder Anne Boden has been telling reporters that Starling is nearly profitable.