Visa’s Proposed Acquisition of Earthport – A Good Test for Antitrust in the 21st Century
As the 2020 Presidential election begins to heat up, something unusual is happening – antitrust policy is being bandied about as an election issue. The reason for this is simple. We live in an era of increasing concentrations of wealth and industrial power. While the impulse to look at antitrust as part of the solution makes perfect sense, many of the proposals on the table, including the suggestion by one Presidential candidate that certain tech companies be broken up, do not make much sense. While such proposals garner headlines, the real solutions lie in the much less glamorous work of effective antitrust enforcement.
A case in point involves antitrust law’s failure to check acquisitions of small innovative firms by larger rivals that eliminate emerging and longer-run threats to their dominance. Antitrust law’s primary mechanism to deal with mergers and acquisitions, Section 7 of the Clayton Act, was designed to block mergers that threaten to “substantially lessen competition” at their incipiency. This statute can and should be deployed to block big companies from neutralizing potential threats from smaller companies via acquisitions. Yet, all too frequently this has not happened. Lest there be any doubt about that, consider the emerging consensus that the antitrust agencies should have blocked Facebook’s acquisition of Instagram, then a comparatively small photo sharing site, back in 2012.
Visa’s proposed acquisition of Earthport, a small technological innovator based in London, tests antitrust law’s ability to address these types of acquisitions. This deal is a classic example of a large company, faced with a threat from an innovative smaller company, moving to eliminate that threat (and co-opt the technology) by acquiring it. That Visa and Mastercard engaged in a bidding war over this formerly obscure company, and quite possibly tacitly coordinated an outcome with Mastercard buying Transfast (another cross-border payments firm) and Visa purchasing Earthport, reinforces that conclusion. Across the world, Visa’s (and Mastercard’s) traditional market power rests on its dominance of consumer payments, spanning both credit cards and debit cards. While it has leveraged that power into commercial cards, it does not wield the same market power in cross-border b2b payments. That segment used to involve primarily high-dollar transactions between large players that leveraged an inefficient correspondent bank system. Now the transaction sizes are getting smaller, new technologies are scaling to address the inefficiencies of the legacy system, and these networks have the capacity to eventually extend into retail payments.
That brings us to Earthport. Since 1997, Earthport has been building what is essentially a global ACH network. It did so by implementing a software layer on top of inter-bank relationships that allows Earthport clients, through a single API, to access its faster payment system. This network can connect with “faster payments” schemes around the world and enable the completion of transactions in an hour. And most important, Earthport has partnered with blockchain developer Ripple to offer distributed ledger technology that facilitates real-time payments. Earthport is now operating in over 200 countries, and its clients include two of the top five banks globally and 4 of the top 20 U.S. banks.
Earthport is precisely the type of small emerging rival that Visa (or Mastercard) should not be permitted to swallow whole. Earthport has deployed an ACH faster payments network, and with Ripple, a blockchain network, both of which could be extended to offer a full range of competitive alternatives to the current payment system. Simply put, these networks are important actual and potential competitors to Visa. Even though this transaction threatens to eliminate that competition, antitrust agencies around the world have been slow to react. So far, only the Competition and Markets Authority in London has seriously examined this deal. That is not good enough. Brussels and Washington need to step up. If antitrust is going to rise to the unique challenges of our fast-moving technological era, this type of deal, at a minimum, should be seriously examined by the major antitrust enforcers around the world. And if the evidence supports the conclusion that emerging competition is being eliminated, the remedy is simple: enjoin the transaction. That will make antitrust relevant again, and Visa’s acquisition of Earthport is a good place to start.