Opinion

Antitrust Zeal Threatens Fintechs

By Katie McAuliffe
November 20, 2020 at 5:00 am ET

With its recent antitrust case against Google, the Department of Justice is making headlines. The government’s penchant for meddling in the market won’t stop with tech companies. Even with Congress’ recent antitrust investigation proclaiming to focus on “Big Tech,” Washington’s true desire spans the entire economy.

One of Congress’ targets is limiting mergers and acquisitions, either through increased scrutiny or new legislation. However, with past restrictions in place that make it more difficult for startups and inventors to pursue initial public offerings, regulators left small business with mergers and acquisitions as one of the few pathways to profitability for their employees.

While many elected officials have expressed serious concerns over technology companies’ behavior, changes to antitrust law and its use will not be limited to technology companies and will affect other sectors of the economy.

In a shocking development, the legal capture has already infested the financial industry. Nearly two weeks after filing its lawsuit against Google, the Justice Department filed a lawsuit to block payment processor Visa from purchasing Plaid, a technology company that serves as a central point of contact and allows users to share their financial account information with third parties such as PayPal and Acorns.

Currently, Plaid has zero market share. While all mergers and acquisitions experience some scrutiny, blocking the acquisition of a purely speculative competitor means the Justice Department is operating on inclinations — not facts. The Department of Justice is essential saying: “We think one day they could be strong, so we don’t like it.” If the agency moves forward and actually blocks Visa and Plaid, it throws the market into unpredictable flux.

As financial institutions enhance their services with technology to meet consumer demand that combines the services of banking, investing and payments, the Justice Department is predictably misconstruing the shape of the market. While Plaid does not process payments, which is Visa’s primary line of business, it does allow customers to link multiple financial accounts to its platform, including usernames and passwords. This would be an adjacent line of business for Visa, similar to Nike’s expansion from just selling footwear to also selling athletic gear and clothing.

Traditionally, expanding into an adjacent line of business is how companies are able to keep pace with changing customer preferences and market innovations.

Visa would not be expanding in payment processing, its primary market of operation, but keeping pace with market trends. Plaid would allow Visa to compete in the real-time payment processing space – this is where most customers want to be – think PayPal, Venmo, Zelle and Cash App. Even the federal government is working to get into the real-time payment processing game.

Visa would be a new competitor in the real-time payments space that is already subject to stringent privacy laws like the Gramm-Leach-Bliley Act, while many of the other financial services companies who gather payment processing information are not. Privacy and security is one unrecognized benefit by the anti-merger crowd, and the aggressive target on adjacent lines of business will prove more detrimental if it is pursued.

For example, at one point Blockbuster was actually poised to maintain its market position, if it had only kept with its strategy in an adjacent line of business – digital video delivery. But Blockbuster decided to change course and stick with brick and mortar locations. Blockbuster’s consumer base wanted digital video delivery, and Netflix filled the void as the Blockbuster name faded from memory.

Companies’ acquiring other companies that have the technology to enter an adjacent line of business is not about dominance and keeping out competitors or stopping a new technology dead in its tracks. It is about adapting to where the customer base is going and providing competitive services.

While the aim is to satisfy customer bases with new services, employees of acquired companies will reap rewards for their innovations. In December 2018, Plaid raised $250 million in a Series C or its third funding round, from prominent venture capital investors Andreessen Horowitz, Spark Capital and Index Ventures, and large financial institutional investors Goldman Sachs and Citi Ventures, valuing Plaid at $2.65 billion. When Visa announced the acquisition in January of this year for $5.3 billion, its investors and shareholders stood to benefit from the sale.

Among these shareholders are employees who deserve the benefits when the Plaid purchase is finalized. A common practice among technology businesses, including fintechs, is to incentivize perspective employees to join the business with insider shares of the company as a trade-off for a lower salary, than working at a large and profitable company like Apple.

But the Justice Department’s antitrust investigation could block many of Plaid’s employees from benefiting from their years of hard work. It would also set a chilling precedent for other startups and discourage future employees from joining small technology companies and accepting shares of the business. This could also force businesses to remain private instead of seeking public markets through an IPO or M&A.

When pursuing antitrust investigations, the enforcing agencies and Congress, should look carefully at how they define markets and who would be harmed should an enforcement action be taken. Expanding into adjacent lines of business is not necessarily anti-competitive; it is often pro-competitive and pro-innovation.

Katie McAuliffe is executive director of Digital Liberty and director of federal policy at Americans for Tax Reform. 

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