As the year’s biggest shopping season gets under way, Amazon last week picked a very public fight with Visa. It emailed UK customers to say it plans to stop taking Visa-branded credit cards and offer them £20 off their next purchase if they switched payment methods.
This is Amazon’s third recent swipe at the global fund transfer business — it has also slapped surcharges on Visa transactions in Singapore and Australia. The spat could well spread, as the companies renegotiate their global deal on fees and their co-branded US credit card.
This is a clash of two titans both used to getting their own way. Amazon is steamrollering its way across the global economy, while Visa and its rival Mastercard consistently post some of the highest profit margins in the S&P 500.
But the spat also spotlights the fact that the rapid spread of ecommerce has changed how people pay for goods and services, raising fundamental questions about who profits from the process. The sums at stake have risen sharply as pandemic repercussions have boosted cards to more than 80 per cent of UK transactions.
Right now, the card payments system is both opaque and unequal. When a customer uses a card, the merchant pays a fee which can run as high as 2 to 3 per cent of the transaction. An “acquirer” fee goes to the payment company that links the merchant to the network, an “interchange” fee goes to the bank that issued the credit card, and Visa or Mastercard keeps the rest.
Merchants can and do shop around among acquirers, but small and midsized companies have no choice but to pay the other standard tariffs. That leaves Mastercard and Visa, which compete fiercely to sign up issuer banks, free to use the fees to woo them. In the US, for example, the two networks account for nearly three-quarters of credit card and debit card spending.
Groups such as the British Retail Consortium have been complaining for years. They won a political victory in 2015, when EU lawmakers capped interchange fees to banks at 20 basis points for debit cards and 30 for credit cards. But scheme fees paid to the card networks have been rising ever since. “It’s humiliating that legislation can be so easily sidestepped,” says the BRC’s Andrew Cregan.
Large retailers have more leverage to demand bespoke deals with lower fees, which explains what is going on right now. Amazon argues that it is trying to provide customers with faster, cheaper payment alternatives and bring down the charges on Visa’s network.
But the company’s ban on UK credit cards appears to be a negotiating tactic rather than a blow for consumer or merchant choice. It hits a section of the market where Visa has a relatively small share, so it minimises the impact on Amazon’s sales, while maximising the pressure on Visa to offer better terms.
Visa says that it earns its keep by maintaining a global network that makes transactions instantaneous, reduces fraud and spares merchants from having to deal with non-paying customers. And its UK fees are not markedly higher than Mastercard’s.
Both networks argue that stores which do not value their services can always reject the cards. That’s a bit rich, given the dire state of the retail industry and the falling use of cash. Some merchants do refuse to take American Express, which has even higher fees, but it has roughly one-tenth the number of worldwide users of the other two.
There is additional inequality baked into this system. Issuing banks use some of the interchange fee to offer rewards or cash back to valuable customers. That means smaller merchants and ordinary customers end up subsidising reward programmes for the savviest and wealthiest cardholders.
The rise of other non-cash payments could disrupt this cozy ecosystem, but it is not yet clear who that will benefit. Amazon will soon start accepting payments via the US digital app Venmo, as well as bank transfers in Poland and instalment plans in Germany. It is well positioned to start weaning customers away from the credit and debit card networks entirely. Rising use of payment apps, such as Apple Pay, also pose a threat to the networks, because customers can skip carrying a physical card and link directly to their bank accounts.
For the latest news and views on fintech from the FT’s network of correspondents around the world, sign up to our weekly newsletter #fintechFT
But don’t count Visa and Mastercard out — they are scrambling to embed themselves in these digital processes as well. Visa has been touting its “network of networks”, while Mastercard has bought several companies that specialise in bank transfers and open banking applications. Maybe this will benefit small merchants and shoppers, but don’t bet on it.