December 10, 2020

Antitrust Considerations in Payments

Ling Ling Ang, Will Taylor, Max Perez-Leon

New payment technologies have received attention in the press, from government agencies, and by the Plaintiffs’ bar.[1] As the payments ecosystem evolves, it is helpful to think about how competition may be evaluated in the payments space, particularly since innovations have been at different functional levels (e.g., merchant point-of-sale (“POS”), payment networks).[2] The concept of two-sided markets has received attention in evaluating competition in payments, notably in the U.S. vs. Visa decision 20 years ago and in the 2018 Ohio vs. AMEX Supreme Court decision.[3]

Platforms (i.e., businesses in two-sided markets) create value by connecting participants. For example, a credit card network connects merchants and consumers.[4] Both U.S. vs. Visa and Ohio vs. AMEX consider credit card networks—including Visa, Mastercard, and American Express—to be platforms.[5] There are a few characteristics of platforms that can be helpful in thinking about past, present, and future payment systems:

  • “Chicken-and-the-Egg Problem”: A platform functions if members of all sides of the market get onboard and participate on the platform.[6] For a card network, this means enrolling merchants and customers. But a motivation for merchants to sign up to accept cards from the network is having customers who already hold cards on the network, and a motivation for customers to sign up for a card on a network is to have merchants already prepared to take a card on the network. This is a “chicken-and-egg problem” because demand by one side of the platform depends on demand by the other.
  • Price Structures: A platform business sets prices and a price structure—a schedule of prices and who pays them.[7] For card networks, this price structure includes interchange fees, which are paid by a merchant’s bank to a card holder’s bank (banks intermediate the transaction between the merchant and the consumer). This cost is, at least in part, passed through to the merchant through a “merchant discount” paid to the merchant’s bank.[8]
  •  Multihoming: Platform participants can connect to multiple platforms, i.e., multihome.[9] A card holder can hold Visa, Mastercard, Discover, and American Express cards in his wallet at the same time and choose different cards for different transactions. Analogously, merchants can choose to accept payments from multiple networks.
  • Tipping: A platform market can “tip” towards one dominant platform instead of multiple platforms.[10]

New payments businesses have entered at different functional levels of the payment supply chain. Some innovations operate over-the-top (“OTT”) of existing networks, others create new networks, and others enhance already existing networks. The Venmo peer-to-peer (“P2P”) network is an example of an OTT network that sources value from traditional payment networks such as the Automated Clearing House (“ACH”) system and credit card networks, while crypto-currencies such as Bitcoin have built a completely new network.[11] Exhibit 1 below characterizes some recent developments in payments in the United States:


Exhibit 1
Recent Developments in Payments

Rigorous economic analysis of the markets for these products will likely involve consideration of where the products are situated in the payment supply chain, including to which participants a particular technology connects. For example, to the extent that innovations are occurring over the top of existing payment networks (as many in Exhibit 1 are), they might not impact the competitive conditions faced by the underlying network. However, building an OTT app does allow a product to build a user base, which could potentially be leveraged by that firm to overcome the chicken-and-egg problem and enter further up the value chain.

The willingness by consumers to subscribe to multiple payments methods (i.e., multi-home by having multiple credit cards in addition to having a debit and using digital apps) may mean that concerns around tipping are less prevalent than they are for other platforms. Furthermore, the advent of mobile payments may ease consumer acceptance of new digital payments networks that operate via mobile phones. While current methods of mobile payments (such as Apple Pay and Android Pay) still generally rely on the credit card networks, as consumers grow acclimated to paying by phones, substituting to other payment methods will likely not require convincing consumers to both switch networks and start using a phone instead of a plastic card, as the latter has already occurred.

The economic literature on two-sided markets has primarily developed over the past couple of decades[12] and has already been cited in a Supreme Court decision.[13] The chicken-and-egg issue is likely to be raised in the context of entry of new payment technologies. As we continue to monitor developments in payments, we also continue to monitor developments in the economic literature for tools to analyze competition in the payments ecosystem.

  1. See, e.g., Peter Rudegeair, Even in a Pandemic, Venmo Tells Conned Customers to Pay Up, WALL STREET JOURNAL, September 24, 2020, https://www.wsj.com/articles/even-in-a-pandemic-venmo-tells-conned-customers-to-pay-up-11600939826 (last visited Sep 28, 2020); PayPal Settles FTC Charges that Venmo Failed to Disclose Information to Consumers About the Ability to Transfer Funds and Privacy Settings; Violated Gramm-Leach-Bliley Act, FEDERAL TRADE COMMISSION (2018), https://www.ftc.gov/news-events/press-releases/2018/02/paypal-settles-ftc-charges-venmo-failed-disclose-information (last visited Sep 28, 2020). Complaint, David Evans, et al. v. Plaid, Inc., 3:20-cv-04804-JSC (N.D. Ca), July 17, 2020. 
  2. See, e.g., The Clearinghouse. The RTP® Network: For All Financial Institutions, https://www.theclearinghouse.org/payment-systems/rtp/institution (last accessed July 20, 2020).
  3. United States v. Visa U.S.A. et al. Inc., 163 F. Supp. 2d 322 (S.D.N.Y. 2001) (“U.S. v. Visa et al.”); Ohio, et al. v. American Express Company, et al., 138 S. Ct. 2274 (2018), 585 U.S. ___ (“Ohio v. Amex”).
  4. Jean-Charles Rochet and Jean Tirole. “Platform Competition in Two-Sided Markets.” Journal of the European Economic Association Vol. 1 no. 4 at 990 (2003). (“Rochet and Tirole (2003)”).
  5. Although U.S. vs. Visa was decided prior to the publication of many of the seminal economic papers about two-sided markets, the court addressed characteristics of two-sided markets such as the “chicken-and-egg problem” discussed below. (U.S. v. Visa; David S Evans & Richard Schmalensee, The Antitrust Analysis of Multi-Sided Platform Businesses, NBER WORKING PAPER 18783 at 3 (2013), available at http://www.nber.org/papers/w18783 (last visited Oct 2, 2020)). The Supreme Court opinion in Ohio vs. AMEX states “[e]valuating both sides of a two-sided transaction platform is also necessary to accurately assess competition.” (Ohio v. Amex, at 14).
  6. Rochet and Tirole (2003), at 990.
  7. Rochet and Tirole (2003), at 990-991.
  8. Rochet and Tirole (2003), at 1013.
  9. Rochet and Tirole (2003), at 991-992.
  10. Marc Rysman. “The Economics of Two-Sided Markets.” Journal of Economic Perspectives 23, no. 3, at 125–43, 137 (August 1, 2009).
  11. The automated clearinghouse (ACH) system is a nationwide network for electronic transfers, such as direct deposit for payroll and Social Security payments. See, Federal Reserve Board, Automated Clearinghouse Services, https://www.federalreserve.gov/paymentsystems/fedach_about.htm (last accessed September 29, 2020); JILLIAN FRIEDMAN, Cryptocurrency: Bitcoin and Blockchain Technology, in ELECTRONIC PAYMENT SYSTEMS: LAW AND EMERGING TECHNOLOGIES 123-7 (Edward A. Morse, ed., 2018); Erin Fonte, Mobile Wallets/Mobile Payments and Peer-to-Peer Payments, in ELECTRONIC PAYMENT SYSTEMS: LAW AND EMERGING TECHNOLOGIES 81, 84-5, 88-90 (Edward A. Morse, ed., 2018).
  12. David S Evans & Richard Schmalensee, The Antitrust Analysis of Multi-Sided Platform Businesses, NBER WORKING PAPER 18783 at 3 (2013), available at http://www.nber.org/papers/w18783 (last visited Oct 2, 2020).
  13. Ohio v. Amex.

Dr. Ling Ling Ang

NERA Economic Consulting

Dr. Will Taylor

NERA Economic Consulting

Dr. Max Perez-Leon

NERA Economic Consulting