Visa / Amazon Interchange dispute shows shift in power
In the battle over interchange fees – this time between Visa and Amazon – it is platform companies that are gaining influence over payment networks.
And, ultimately, everyone comes home a winner.
Except the banks.
In this new digital age, as commerce has changed and will continue to change online, we are seeing a bit of muscle flexing (for lack of a better term) from Amazon. The e-commerce giant has said it will stop accepting Visa cards in the UK due to excessively high interchange rates. And alongside this news, Amazon is also considering removing Visa as a partner on co-branded cards.
Read more: UK issued Visa credit cards no longer accepted by Amazon as of 2022
The two parties are in discussions for a resolution of the dispute, which tells us two things.
First, neither side is prepared to lose the other’s business entirely. Amazon, concerned that the UK is its third largest market, will likely want to keep the Visa payment option in place to meet the needs of Brits who choose to pay with these cards (plastic and digital). Visa, in an attempt to keep the relationship in place, could lower its interchange fees in the region. In Europe the cap is 30 basis points (as a percentage of the trade), and in the UK the cap is 1.15%, so let’s assume there is a meeting in the middle, which puts straining part of Visa’s business in the region. but do not kill him entirely.
The year 2021 – and the transition to 2022, when Amazon’s supposed card ban goes into effect – signals that we are a long way from 2016. That’s when Walmart and Visa fought over rates. interchange and that a deal was stalled after Walmart (and other merchants) took the legal route (all the way to the Supreme Court) to protest (and the retail giant hoped), hamper fees interchange. It’s reasonable to assume that Visa has imposed “lighter” interchange rates on Walmart as a result of this settlement, although the details are unclear so far.
Bypass the courts
This time around, Amazon’s decision to go the unilateral route rather than going through court indicates a level of trust that it doesn’t need to go through legal channels to get what it wants ( in this case, lower interchange rates). Keep in mind that over the past few months, Amazon has been working to expand its range of alternative payment methods (including Venmo and Affirm). So the pressure comes from the markets themselves, where consumers have a range of choices beyond cards to transact.
So the power of the platform is evident, where partnerships with FinTech start-ups give Amazon a way to promote a new payment functionality and compress card networks a bit. To illustrate Amazon’s power in the market, the e-commerce giant said last week that it offers an incentive to switch to other cards or Visa debit (where interchange fees are lower). The company will offer consumers a discount of 20 pounds (about $ 27) to switch to Visa credit cards.
In the meantime, as the latest rush on interchange fees unfolds, it’s important to look at the economics of what might happen with a settlement that results in lower interchange rates. Visa collects a flat-rate transaction-related processing fee (like other card networks, a flat-rate fee – the evaluation fee – of a few basis points), while the actual interchange fees that are charged to merchants are paid to the issuing bank. Credit card interchange rates can vary depending on whether cards are swiped or seized and types of transactions, but can be over 1.5%, while debit is only a fraction of that, and l The interchange here can be around 30 basis points.
Aggregate data from sources such as the Federal Reserve shows interchange fees in 2019 amounted to $ 24 billion (and with the pandemic and the big digital shift, the new official figures accounting for the impact of contactless payments will be considerably higher). This money, in turn, is used by banks to innovate rewards and other offers. If that source were to diminish a bit, perhaps banks could focus on making more money through traditional lending activities – by increasing credit card balances, for example, with higher interest income that resulting from it – signaling a shift in business models. To achieve this, those same financial institutions (FIs) might have to spend more on marketing costs, or might find (at least initially) some pressure on margins on the horizon.
As the Visa-Amazon dispute unfolds, banks may feel a pinch, as the card network and powerful online platform (s) lean toward a truce.