Amazon and Visa Settle Fee Dispute
When we go out shopping with a credit card, we rarely worry about whether a store accepts Visa or Mastercard. As far as most consumers can tell, acceptance of these two brands is practically mandatory, and you can bet Visa and Mastercard like it that way. So when a major retailer drops one of these brands or even threatens to do so, it gets serious attention.
In November, Amazon UK announced plans to stop accepting Visa payments, only to reverse course in February after working out a deal with the network. Why are Amazon and other retailers pushing back against card brands like Visa lately?
Most consumers assume that while you can’t always take it for granted that Discover or American Express will be accepted at any given store, “credit cards accepted” always means Visa and Mastercard. Unlike their smaller rivals, the two biggest card networks operate in a similar fashion and put out closely aligned rule changes and policy mandates, to the point where it often makes sense to regard them as a single unit, “the big card networks,” a monolith.
In actual fact, however, they are entirely separable, as Amazon UK and other retailers have been increasingly willing to demonstrate. Retailers are free to decline acceptance of Visa or Mastercard just as they frequently do with Discover and American Express, and the only reason it’s so rare is that Visa and Mastercard’s market share is so enormous. Cutting off one or the other would mean that lots of customers would have no way of making a card payment.
It’s hard to negotiate better rates and terms with a card network when your only leverage is to stop accepting them, and doing so would mean turning away large numbers of your customers. Nevertheless, that’s exactly what Amazon UK appeared prepared to do.
Why Did Amazon UK Say They Were Going to Stop Accepting Visa Cards?
In November 2021, Amazon announced that as of January 19, 2022, they would no longer accept Visa cards in the UK. When asked to explain its reason for this decision, Amazon did not mince words. They cited the high cost of credit card processing fees, claimed that the rise in these rates was making it difficult for merchants to offer low prices to their customers, and suggested that improvements in technology should be making it cheaper to process credit card payments, not more expensive.
Some context behind this scenario is that Visa had, in fact, recently raised interchange fee rates on transactions between the UK and the EU. Under EU law there is a cap on how much credit card networks can charge for interchange fees, but the UK, having left the EU via the Brexit process, was no longer under the protection of that law, and so Visa and Mastercard both took the opportunity to raise their rates there.
Visa’s change took effect in October 2021, raising the rate on card-not-present credit card transactions between the UK and EU from 0.3% to 1.5%—a significant jump upward.
While many different fees can get attached to a credit card transaction, depending on the merchant’s payment processor setup, the largest portion is the interchange fee charged by the card network. Of all the costs associated with accepting credit card payments, increases to the interchange fee rate will have the largest and most immediate impact on merchants.
Why Did Amazon Change Its Mind?
In February, Amazon and Visa announced that they had come to an agreement and that customers would be able to continue using Visa cards at Amazon UK without interruption. Not surprisingly, neither party divulged any details about how they resolved their differences.
It’s quite possible that Amazon was able to negotiate a better interchange rate for themselves. If there’s any retailer with enough leverage to push around the world’s biggest credit card network, it’s Amazon.
On the other hand, it’s also possible that Amazon ran the numbers, looked at how much business they’d be losing by turning away Visa credit, and decided to change up their strategy.
This isn’t the first time a major retailer has publicly announced a break-up with Visa, only to change their minds later. Kroger tried it with some of their grocery store chains a few years ago, for the same reason as Amazon—excessive fees. We don’t know for sure if these hardball tactics are actually winning good concessions out of Visa, but it’s telling that we’re seeing more merchants willing to try them these days.
Why Aren’t Credit Card Networks in a Stronger Negotiating Position?
When e-commerce first started to take off, credit cards were the easiest and most obvious way to make electronic payments. If you didn’t accept a customer’s preferred credit card, you probably weren’t going to make a sale.
Now there are viable alternatives for making electronic payments, many of which are being eagerly embraced by a younger generation of consumers that have grown up skeptical of credit cards and the financial hardships they can invite.
Buy Now, Pay Later services are still tiny compared to credit cards, but they’re the fastest-growing payment method in the world right now. In the past, if a customer got to the checkout and found that their only credit card was not accepted, that would be the end of the sale. Today, merchants can offer that customer a BNPL option that they can apply for at checkout and receive approval within seconds.
Credit cards aren’t under threat of extinction yet, but as consumers and merchants come around to the idea that other online payment schemes are possible, their hold on the industry may loosen a bit. There’s no avoiding Visa and Mastercard if you want to maintain the most accessible payment options possible for your customers, but alternative payment methods can offer a number of advantages, such as the fact that they aren’t subject to chargebacks.
This dispute also serves as a reminder of the tremendous impact that credit card fees can have on merchant revenue. We see this with chargeback fees—the loss of the goods and transaction amount are bad enough, but the added fees can really hurt. Smaller merchants don’t necessarily have the clout to bargain down interchange rates by threatening to kick Visa to the curb, so it’s important to minimize avoidable fees where you can by working to prevent fraud and chargebacks.