The U.S. Justice Department is suing Visa Inc. in a bid to block its proposed $5.3 billion acquisition of Plaid Inc., a startup that Visa executives allegedly saw as having the potential to threaten one of its core businesses.

The Wall Street Journal reported on the lawsuit this morning. 

Visa’s namesake payments network is used by merchants around the world to process debit and credit card transactions. In the U.S., the company processes about 70% of online debit transactions.

Plaid also helps facilitate online transactions, but it plays a different role in the market. The startup provides a platform that digital finance services such as mobile banking apps use to let their users make purchases with funds from their bank accounts. Plaid’s value proposition is that it saves companies the expense of manually building integrations for connecting to their users’ bank accounts. 

It’s a relatively narrow capability, but one that’s essential for the so-called financial technology or fintech industry. Plaid has more than 2,500 fintech customers, including many of the biggest players in the segment, among them PayPal Holdings Inc. and Stripe Inc. It’s estimated that about one in four Americans have used Plaid to connect their bank accounts to a fintech service.

In the new lawsuit, the Justice Department argues that Visa’s acquisition of Plaid amounts to an attempt to eliminate a nascent competitive threat. Visa, the lawsuit argues, maintains a monopoly position in the online transaction market that rivals haven’t been able to contest meaningfully. The Justice Department says Plaid has a rare opportunity to truly challenge Visa in a way that would likely lead to “substantial savings and more innovative online debit services for merchants and consumers.”

Visa’s proposed acquisition could prevent those benefits from materializing, the lawsuit posits. The Justice Department charges that the deal is in violation of the Sherman Antitrust Act and Clayton Antitrust Act.

Plaid doesn’t currently offer a service that directly competes with Visa by allowing users to make payments to online merchants. However, the Justice Department says the startup had plans to create a “meaningful money movement business by the end of 2021.” Visa executives allegedly found out about the plan while performing due diligence for the acquisition and decided to buy Plaid as an “insurance policy.”

“In making the case to buy Plaid to Visa’s Board of Directors, Visa’s senior leadership estimated a ‘potential downside risk of $300-500M in our U.S. debit business’ by 2024 should Plaid fall into the hands of a rival,” the lawsuit states. “Visa understood that could create an “[e]xistential risk to our U.S. debit business” and that “Visa may be forced to accept lower margins or not have a competitive offering.”

Visa said in a statement today that “the combination of Visa and Plaid will deliver substantial benefits for consumers seeking access to a broader range of financial-related services, and Visa intends to defend the transaction vigorously.”

Image: Plaid