Plaid, Visa, and DOJ: A Trove of Bad Docs
The evidence DOJ used to build a case against the $5.3B Visa-Plaid deal
Unlike other mergers challenged by the DOJ, Visa’s acquisition of Plaid on its face presents no apparent risk of antitrust harm. Visa and Plaid have no product overlaps. They don’t have a customer-supplier relationship. Visa enables transactions between consumers and merchants. Plaid connects fintech apps to users’ bank accounts. The incriminating evidence comes from the parties’ (primarily Visa’s) own emails and other internal documents, revealing Plaid’s product roadmap to build a cheaper alternative to Visa’s debit service and Visa’s plans to hold back that development.
Until the DOJ’s November 5th complaint, the deal has not attracted much antitrust attention. Early articles announcing the deal detected no antitrust concerns, describing the acquisition of Plaid as simply “an entry point for Visa into new opportunities in the fintech industry.” The only hint of antitrust risk I noted was the number of antitrust lawyers staffed on the deal. In August, the UK’s competition authority cleared the deal, finding that Visa’s internal documents supported its stated deal rationale to expand its network and offerings (unclear whether the UK regulators saw the same emails as the DOJ) and that the merged company wouldn’t have the ability to push rivals out of the market.
Only in reading the internal company communications cited in the DOJ’s complaint does it become clear how this acquisition can harm competition.
Let’s dig in:
“I don’t want to be IBM to their Microsoft” - Visa’s VP of Corporate Development, March 2019, in evaluating Plaid as a potential target
This alludes to Microsoft’s role in displacing IBM’s monopoly in the nascent PC market in the 1980s when Microsoft introduced Windows and enabled other PC manufacturers to compete with IBM. Had IBM acquired Microsoft at the time, IBM would likely have been able to protect its monopoly power for longer. IBM would have stopped Microsoft from supplying Windows to other PC manufacturers.
If Visa does not buy Plaid, “they will clearly come after the ‘high prices’ of interchange as they said several times yesterday and offer alternate payment methods” - Visa’s VP of Corporate Development, December 2019, after a meeting with Plaid executives
We see that Visa views Plaid as a threat to Visa’s margins and that acquiring Plaid is the only way to ensure that prices don’t fall. A merger that gives a company the ability and incentive to raise prices is anticompetitive and illegal.
Not buying Plaid could create an“[e]xistential risk to our U.S. debit business” and “Visa may be forced to accept lower margins or not have a competitive offering” - Visa in rationalizing the acquisition to its Board of Directors, estimating a “potential downside risk of $300-500M in our US debit business” by 2024 should Plaid fall into the hands of a rival
Visa views the acquisition of Plaid as essential to maintaining its market power and its margins because Visa predicts that Plaid will introduce a cheaper, more efficient replacement for Visa’s service that will force Visa to lower its prices. If Visa successfully acquires Plaid, however, Visa’s CEO has no plans to introduce Plaid’s pay-by-bank debit service in the US.
“Our US debit business i[s] critical and we must always do what it takes to protect this business” - Visa’s CEO, January 2020, in justifying the purchase price for Plaid (at a revenue multiple of more than 50x and twice Plaid’s latest December 2018 valuation of $2.65 billion)
Here, Visa admits that the merger serves to “protect” its US debit business. To keep prices high in its US debit business, Visa needs to acquire Plaid. In removing an innovative new entrant that would cut prices, the acquisition hurts consumers and competition. Granted, these clips are only evidence of Visa’s beliefs of the merger’s effect, but they likely carry weight and credibility given the executives’ knowledge of and experience in the industry. To rebut the DOJ’s allegations, Visa would need to discredit its own CEO and executives.
“The acquisition is in part defensive, not just for Visa but also on behalf of our largest issuing [bank] clients, whom we believe have a lot to lose if [pay-by-bank transactions] accelerate as the result of Plaid landing in the wrong hands. It is in our collective interest to manage the evolution of these payment forms in a way that protects the commercial results we mutually realize through card-based payments” - Visa executive in explaining the acquisition of Plaid
Visa admits that in acquiring Plaid, it will “manage the evolution”—i.e., slow the innovation—of new payment forms in a way that protects Visa’s profits from card-based payments. Reduced innovation is a form of anticompetitive harm.
Plaid is “clearly, on their own or owned by a competitor going to create some threat to our important US debit business” and purchasing Plaid will be an “insurance policy to protect our debit biz in the US” - Visa’s CEO, after learning in due diligence that Plaid planned to offer pay-by-bank debit services that would compete with Visa’s online debit services by the end of 2021
Visa’s CEO estimates the threat from Plaid to be real and large enough to be worth paying $5.3 billion—about 25% of Visa’s annual revenues—to eradicate. He believes that by removing this threat, the merger will allow Visa to protect its US debit business, i.e., keep prices high. Not all mergers between two competitors are anticompetitive, but typically, mergers that remove a significant competitor who acts as price constraint are illegal.
With its new online debit service, Plaid intended to “steal[] share” and become a “formidable competitor to Visa and Mastercard” - Plaid
Plaid’s plans corroborate the narrative of Visa’s executives. Plaid plans to compete with Visa, so the acquisition would eliminate a nascent competitor.
Plaid’s current capabilities are just “the tip showing above the water” and “[w]hat lies beneath, though, is a massive opportunity - one that threatens Visa” - Visa’s VP of Corporate Development in describing and drawing Plaid as an island volcano (yes, really)
Visa’s motivation in acquiring Plaid is to eliminate emerging and future competition.
This complaint serves as a cautionary tale to executives that their emails and other internal documents can sink or at least delay a merger. Many of the communications cited above are documents that under the HSR Act every party to a major merger must turn over to regulators when they enter into a purchase agreement (no wonder so many antitrust lawyers were working on this deal from the start). Further, the complaint shows that US regulators are paying attention to acquisitions of disruptive, fast-growing startups even where the parties have no apparent product overlaps or supplier-customer relationships. Had the DOJ not looked carefully at the documents here, any competitive harms from the deal would have remained hidden from the public and consumer benefits from a separately competing Plaid unrealized.
It is unclear whether Visa will walk away from the deal or go to trial. If Visa litigates this merger, the DOJ will have a chance to win its first trial based on a nascent competitor theory. Nascent competition trials have been rare, and the DOJ has not won any yet. The internal company documents alone give the DOJ a lot of ammunition. But the case is not open and shut. The DOJ still needs to prove the relevant market, Visa’s market power, and the unique strength of Plaid as a challenger.
If Visa walks away, even though Visa cannot extinguish Plaid’s threat, Visa has still delayed it through the attempted merger. According to the complaint, Plaid has already slowed its plans to pilot its pay-by-bank debit service with prospective merchant customers.