Last month, Visa’s $5.3 billion acquisition of Plaid terminated, despite many months of their anticipated merger. This termination occurred a few months after the United States Department of Justice filed a civil antitrust lawsuit on Nov. 5, 2020.
Plaid, whose name might not ring a bell, interfaces apps such as Venmo and Robinhood, apps that are wildly popular amongst college students. Plaid, a San Francisco-based startup, helps cut the bank middleman out of the loop, simplifying transitions for many apps, also including Betterment and Coinbase.
Many experts suggest the $5.3 billion undervalued Plaid’s place in the marketplace, so Visa would have benefitted from owning the platform, whether to improve Plaid’s systems, or, more sinisterly, to eliminate competition.
Following the agreement’s termination, Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division said, “In a victory for American consumers and small businesses, Visa has abandoned its efforts to acquire an innovative and nascent competitor,” in a statement published on the United States Department of Justice’s website. “American consumers and business owners rely on the internet to buy and sell goods and services, and Visa – which has immense power in online debit in the United States– has extracted billions of dollars from those transactions. Now that Visa has abandoned its anticompetitive merger, Plaid, other future fintech innovators are free to develop potential alternatives to Visa’s online debit services. With more competition, consumers can expect lower prices and better services.”
James Markulic, adjunct professor in the NJIT Computer Science and Information System Masters programs, described the U.S. government’s role in preventing monopolies in technology companies. Markulic has previously taught an undergraduate class at NJIT called “Computers, Society, and Ethics,” which is a required course for majors within the Ying Wu College of Computing. This is a discussion-based course that involves using ethical codes and philosophy to analyze the impacts of technology on society.
“The Justice Department’s overall role in mergers is to prevent monopolies or mergers in general that either have the possibility of reducing the overall quality of service in the industry or gives one company the ability to control pricing for an industry. A good comparison would be the recent ‘New Jersey healthcare system merger would increase price and reduce quality of healthcare’ press release,” explained Markulic, referring to the Federal Trade Commission’s Dec. 2020 suit against Hackensack Meridian Health’s proposed merger with its competitor, Englewood Healthcare Foundation. “The government’s role is easier to understand in a healthcare discussion that can impact everyone vs. a discussion regarding the credit/debit card industry which can require industry knowledge. For example, up until recently, the government has not been overly concerned with monopolies in social media. One school of thought is that the government (due to the age of lawmakers) does not understand the power of social media. The recent attacks on the Capitol certainly gave them a quick lesson.”
“Since financial services have such a large lobbying influence, you will see the government have an increased interest,” continued Markulic. “The issue here is similar to the hospitals. Visa already has a large portion of the industry. Banks and other credit/debit card providers do not want to see that increase and allow Visa to push other providers out of business. The industry’s focus on fintech is the battle for the younger generation’s banking business. So these can be looked at as battles for the future of the industry.”
The United States has had antitrust laws dating back to the 19th century. These laws, such as the Sherman Antitrust Act of 1890, were designed to better manage the monopolies of the Gilded Age, a time period of rapid industrial and economic growth.
“Capitalism promotes competition with the belief that it makes the market better (the market being Fintech in this discussion),” explained Markulic. Markulic further explains how in business ethics, such mergers would be encouraged because they increase shareholder wealth. “This school of thought would justify acquiring companies to limit competition against your company. The less competition, the more a company has the ability to control pricing and quality. The effect on society, however, is secondary in “old-school” business ethics. That’s where government has the responsibility to stop that from happening.”
“The effect of [mergers in] society is hard to judge, but here’s an example to think about. What would the effect on society have been in the camera and film industry had [a major film corporation] decided to acquire the right to digital photography back in the 1990’s? What effect would there be on society if items like phone cameras and police body cameras were discouraged by the industry and not available as they are today and tech like facial scanning was promoted and heavily used? In the 1990’s it would have been difficult to imagine the effect those decisions would have had on society today. It’s only in hindsight, when it’s easy to see the effect a company or industry controlling an evolving technology can have on society,” said Markulic. “Business ethics could say controlling an industry is good because it increases shareholder wealth. Societal ethics would have a vastly different view.”
There’s evidence that anti-competition already exists in the Fintech industry, even before a merger happened. Plaid has incurred some controversy for its phishing practices, which Markulic said “highlights one of the concerns with fintech and other technology companies.” Essentially, Plaid emulates the login pages of legitimate banks to serve as a middleman between the client’s bank account and apps like Venmo and Robinhood.
“Since Fintech is for the most part unregulated, they get away with this type of behavior, which in my opinion is always unethical. It’s unethical to make someone believe that using your services have the oversight and backing of another company and industry. Using a bank gives you government protection against fraud and insures your money. Fintech often does not have these guarantees, and tricking consumers into thinking they are directly dealing with a bank is certainly unethical.”
“Another example to the effect of what protection the government could provide is to look at Zoom. Zoom claimed to have a totally secure platform. Very early in the pandemic, everyone found out that was not the case. If Zoom was part of a regulated industry, government auditors would have evaluated security within Zoom and be in a position to force banks (as an example) to fix security flaws before it was released to the public. Zoom’s security would have been verified by the regulators and they would not have been allowed to promote their platform as secure. Tricking the public into thinking that Plaid is a bank site also tricks the consumer into thinking they are using their bank and has their bank’s protections instead of actually using an intermediary. It gives the appearance that consumers are protected when they are not. This can never be ethical, but these are unfortunately common practices in evolving tech companies.”
Despite the recent crackdown by the Department of Justice that seeks to prevent anticompetitive measures, it remains evident that such competition already exists on large levels. Companies, including Visa and Plaid, require a close watch in the coming years.
