UPDATED: March 9, 2022, 4:52PM EST

The Interchange: Plaid-Visa antitrust concerns highlight the value of stablecoins built on open public infrastructure

Quick Take

The battle for ACH, and why stablecoins and CBDC built on public open infrastructure could offer a more competitive payment system

It has been nearly 10 months since Visa announced it will be acquiring Plaid, a fintech that provides a platform for applications to connect to banks, for $5.3 billion; making international headlines and kicking of 2020 with one of the buzziest acquisition announcements in recent memory.

At the time, I wrote in a column wondering whether the deal would be considered anti-competitive and if regulators would one day look back on the deal the same way they now question Facebook being allowed to grab WhatsApp and Instagram and bring all under one roof.

"To be fair, I have seen zero chatter of this deal be anti-competitive in any real-sense, and I'd assume that's because there are several other forms of companies across the globe that are building identity layers that can hook into digital financial service offerings. But my question then becomes, do we care if a company can control more than 50% of global payment volume (via card networks) AND be the identity data layer that also connects more than half of the largest non-bank lenders, fintechs, and some of the largest commercial banking franchises in the world? That's a future that seems at least plausible for where Visa-Plaid could be heading."

The Interchange - Jan 2020

And then 2020 happened, and frankly any company with as non-assuming of a name as 'Plaid' surely should have fallen through the cracks. Or so I thought.

Yesterday, the DOJ officially filed an antitrust suit challenging Visa's acquisition of Plaid under the context that it would ultimately reduce payment competition. Specifically, the DOJ is concerned about the ability for Visa to extend its monopoly over debit transactions due to its belief that Plaid is developing a product that could directly compete with Visa's debit services.

"Visa rarely faces any significant threats to its online debit monopoly. Plaid is such a threat... While Plaid’s existing technology does not compete directly with Visa today, Plaid is planning to leverage that technology, combined with its existing relationships with banks and consumers, to facilitate transactions between consumers and merchants in competition with Visa. Like Visa’s online debit services, Plaid’s new debit service would enable consumers to pay for goods and services online with money debited from their bank accounts. With this new online debit service, Plaid intended to “steal[] share” and become a “formidable competitor to Visa and Mastercard.” Competition from Plaid likely would drive down prices for online debit transactions, chipping away at Visa’s monopoly and resulting in substantial savings to merchants and consumers."

US DOJ v Visa and Plaid

If diving into the inner working of debit and card network systems is your thing, or you're curious to learn more about how these systems currently operate, it's worth checking out the full lawsuit here. The TLDR; is that the DOJ believes that "pay-by-bank" services (something Plaid is positioned to leverage by having more than 200 million accounts linked on its platform, connected to the roughly 11,000 financial institutions), which allow consumer's to use online bank account credentials to "to identify and verify the user, bank, account number and balance, and facilitate payments (through an ACH network) to merchants directly from the consumer’s bank account," could be poised to take share away from Visa's debit business.

So what does this have to do with crypto? I'd argue this antitrust case highlights a reminder of the power that tomorrow's stablecoin and CBDC enabled payments systems built on open public infrastructure could provide for broader payment competitiveness. A system that uses digital wallets, built on an alternative infrastructure, that doesn't require legacy ACH (Automated Clearing House) — a batch processing network connecting financial institutions across the U.S. — to settle transactions across consumer accounts.

That tomorrow may be closer than many outside the industry likely expect.

While ACH transactions make up ~82% of all U.S. payment dollar volume (~$51.2 trillion) — according to Plaid blog Fin, "if you’ve ever sent money to a friend with Venmo, had a utility bill automatically debited from your checking account, or received a direct deposit from your employer, then you have transacted via the ACH network," — it's remarkable to consider that stablecoins are actually on pace to settle nearly $1 trillion in transaction volume on public blockchain infrastructure this year (when including DAI).

Source: Fin by Plaid - ACH Payments

Not surprisingly, Visa also is keeping tabs on such a world, and recently provided some insight into its own crypto investment strategy which will focus on infrastructure plays, aligned with the company's overarching vision to be a "network of networks." That includes infrastructure to one day support CBDCs and stablecoins.

But it's also not just Visa.

Some central banks are exploring a retail CBDC (built on alternative payment and settlement infrastructure) to improve and protect payment market competitiveness. One example of this, and highlighted in The Block Research CBDC Report, is the Swedish e-Krona, which is currently being piloted in a market that exhibits an already well-developed and saturated payment market.

Sweden's well-developed financial market infrastructure and the growing adoption of Swish, a fast-retail payment system, provides a unique landscape to observe potential impacts to payment markets should the e-Krona become implemented.

Currently, transactions made through the Swedish bank-owned mobile payment service Swish must go through bank-owned systems instant payments are settled through a bank-owned system called Bankgirot (BG), while credit transfers/money orders and checks are processed by Datacearingen (DCL – owned by Swedish Banker’s Association).

Should the e-Krona be built upon distributed ledger technology, and the Riksbank offers an open API at the wholesale level, new payment service providers could enter this system and offer services that wouldn’t rely on the current legacy settlement infrastructure and incumbent banks.

In this scenario, new e-Krona payment providers could enter the market and not be dependent on accounts held at BG or other clearinghouses or on the other services these clearing platforms provide.

In such a case, the ability to bypass legacy clearing and processing markets and the potential to lower barriers of entry for new e-Krona payment service providers could provide an environment in which new forms of payment market competition forms.

Which brings us back to Visa and Plaid.

I thought Lex Sokolin, Co-fintech lead at ConsenSys summed the potential market power of Visa-Plaid best in his coverage of the deal when it was first announced at the start of the year:

"Visa is a $500 billion market capitalization company -- rivaling the size of JP Morgan and Bank of America. They understand network businesses, and why those are better than pure software-as-a-service businesses. Building a multi-sided network, which includes merchants, consumers, banks, regulators, and global complexity creates an incredible barrier to entry and a profoundly defensible revenue generator. All you need to do is for users to generate economic activity between themselves, and take a tiny cut. The Visa model relies on human nature, not the quota of your sales people."

"Once you have aggregated 200 million logins and can cause money movement between bank accounts, you become a de facto payments network. In Europe, the PSD2 directive mandates that all banks open up their APIs to allow both information aggregation and money movement by licensed third parties. In the US, we are still trying to crowbar information out of the banks through screen-scraping. But the direction of travel is clear -- data is money, and the bots will move it around."

Lex Sokolin, Future of Finance

Looking ahead, the opportunity for stablecoin commerce, built on public blockchain infrastructure such as Ethereum, is an alternative settlement network that could be cheaper, faster, and more secure in settling value transfers than current legacy systems.

But more importantly, such a network could also solve the issue of monopolizing payment networks around one or two core providers — like the DOJ fears with a Visa-Plaid merger — as public blockchain infrastructure would be maintained not by a rent-seeker such as Visa, but by the miners (or in ETH2.0, the stakers) that secure the network (subsidized by a gas model that equates to today's interchange and fee models present across card and debit networks).

While still very early days for such systems, it's a testament to the disruptive power that this infrastructure could one day bring.