Reversing Regulatory Overreach Will Encourage Payment Innovations

Forbes

20-03-2025

Credit Card Purchase
getty
Innovation is often a victim of its own success as the once unimaginable becomes the invaluable service people cannot live without. The modern payments system exemplifies this phenomenon.
Innovations by fintech startups as well as traditional financial companies now enable trillions of dollars in transactions annually. And thanks to robust competition and continual innovations, the quality of these services for consumers and businesses continues to improve.
The growth of the payments system also caught the attention of regulators, and previous regulatory actions by the Biden administration now threatens this progress. But there is a new sheriff in town, which creates an opportunity to reverse these unnecessary restrictions.
Ensuring that markets are competitive and operate for the benefit of consumers is a difficult task, especially because the market process for many goods and services is complex and consistently evolving. It can be difficult for regulators to accurately identify when actions may violate anti-trust laws and when those actions are growing market share because the company is figuratively building a better mouse trap.
The consumer welfare standard, which has been consistently applied for decades, has provided a sound standard for differentiating these actions. Essentially, if businesses' actions promote the interests of consumers, then there is no violation of antitrust law. This standard makes perfect sense – after all, the ultimate purpose of anti-trust law is to protect consumers not businesses who are providing their customers with inferior products.
To the detriment of consumers, the Biden Administration abandoned this standard. Without the guidance provided by the consumer welfare standard, the Biden Administration pursued misguided antitrust actions that threatened to reduce the quality of payment services consumers receive. The Department of Justice's (DOJ) lawsuit against Visa illustrates the potential consequences.
The lawsuit takes an unreasonably narrow view of the financial payments system to allege that Visa is a monopolist – specifically, Visa allegedly holds a monopoly over debit card transactions. These allegations are both wrong on the facts and bad for consumers.
On the facts, consumers have many electronic payment options. There are direct competitors to Visa that include Mastercard and Discover. There are also the growing alternative payment models that compete with these traditional options including Apple Pay, Google Pay, Venmo, PayPal, and Cash App. Consequently, the payment market, where new competitors consistently enter and thrive, is hardly one that is dominated by a monopolist.
The regulatory environment, specifically the flawed Durbin Amendment, also undermines the DOJ's allegations. This amendment mandates that every debit card issuer offer a choice of two competing networks. In other words, a competitive environment in the debit card portion of the market is already required.
Given that there are many competitors to Visa, and onerous regulations already mandate competition for every debit card, it is unclear how the DOJ can argue that consumers do not have choices. They do, and it is unlikely that the lawsuit would ever have been filed had the Biden Administration followed the consumer welfare precedent.
But instead of focusing on whether consumers benefit or not, the antitrust regulators focused exclusively on size. This New Brandeisian school of antitrust thought misapplies the Sherman Act and essentially assumes that a growing market share for large companies is, on its face, suspicious. The focus of antitrust actions quickly turns toward breaking up large companies or preventing beneficial mergers and acquisitions that promise consumers better quality services at lower prices. Whether the market is competitive and whether consumers are better off are barely secondary considerations.
Since regulators are not focusing on consumers' welfare, it should not be surprising that this regulatory approach does not benefit consumers. In addition, the rejection of the consumer welfare standard biases the environment toward excessive regulations. After all, a standard that raises antitrust concerns based on size, regardless of the benefits that consumers are receiving, will ultimately overregulate.
Excessive uncertainty inevitably follows when the government regulates more and bases those regulatory actions on non-material criteria. This greater regulatory uncertainty discourages investment and stifles economic growth. Ironically, the complex regulatory environment that inevitably follows makes it harder for new players to enter the market, defeating the very goal of antitrust law.
Given these consequences, the path forward is clear. With respect to the innovative payments sector, the administration should roll back the current lawsuits and continue dismantling harmful regulations that restrict innovation.
More broadly, the antitrust regulatory standard should return to the pro-growth consumer welfare standard. This standard promoted a balanced, free-market approach to competition policy that encouraged competition and fostered innovation. Most important, it ensured that the competitive landscape benefit consumers, which, after all, is the reason why antitrust policies exist in the first place.