The chief executive of Visa called Amazon’s decision to ban UK-issued credit cards on its platform “strange” and “unfortunate” but said he hoped the dispute would be resolved through negotiation.
“Clearly, we are in a challenging negotiation,” Al Kelly told the Financial Times. “The difference here is that Amazon has unfortunately decided to publicize the issues in the deal we’re having, and strangely chose to threaten to punish consumers.”
Amazon warned customers on Wednesday that from next year it will no longer accept UK-issued Visa credit cards, and has offered affected customers a £20 (£148) discount on their next purchase using a alternative payment method. The retailer also said it is considering ditching Visa as a partner on its mixed-brand card in the United States.
“This shouldn’t be considered a shock, as Amazon has used all available negotiation tactics to reduce the cost of processing payments,” Autonomous analyst Kenneth Suchoski wrote in a note, saying Amazon’s decision would have little impact on Visa’s financial results.
Amazon told UK customers it was acting on Visa’s high fees. However, Mastercard and Visa have set nearly identical transaction fees in the UK, according to payments company Bambora.
“I find it very strange that they claim they did this because of the high cost of accepting these products in the UK,” Kelly said. “It’s absolutely inaccurate.”
Visa and Mastercard announced increases in interchange fees applicable to payments between the UK and the European Union following the formalization of Brexit this year. For digital payments without the presence of a physical card, rates were increased from 0.2% to 1.15% for debit transactions and from 0.3% to 1.5% for credit transactions.
A person familiar with Amazon’s position said interchange fees are just one point of conflict among several that involve Visa. The person said rising costs were a concern before Brexit, and executives felt the payments provider “was not adding much value”.
Before Visa’s interchange fee increase in October, Amazon had acted to limit its use in markets like Singapore, where a 0.5% surcharge on Visa credit transactions was adopted this year, and in Australia. In both countries, coupons were offered to customers who switched to other forms of payment.
Amazon does not consider it reasonable for Visa to charge additional fees to protect against fraud in online sales, given its vast amount of data and knowledge about consumers. “Amazon invests heavily to protect our customers from fraud and abuse,” said a spokesperson.
“Even so, Visa’s prices remain high, while merchants remain responsible for fraud.”
The clash with Amazon is the latest issue for Visa, which faces growing threats to its core payment routing business.
“These are not the happiest days for Visa,” said Dan Dolev, an analyst at Mizuho. “They are being attacked on several fronts.”
Visa and Mastercard have had an effective duopoly of global payments for decades, due to the popularity of cards as a method of payment. However, competition from fintechs and geopolitical pressures threaten to reduce their influence.
Amazon’s lawsuit against Visa is just the latest example of merchants looking to lower interchange fees. They cite studies that show that the cost of processing transactions has dropped dramatically, but the fees charged have remained the same.
Payment networks and issuers enjoy profit margins of 30% to 50%, while retail margins are approximately 3%, according to consultancy CMSPI.
Although card operators set interchange fees, they point out that they don’t receive most of the money raised.
“At Visa, we have a responsibility to set prices in markets where they are not regulated, and no one is ever happy with us,” Kelly said. “If the price falls, financial institutions are not satisfied, the price goes up and merchants are not satisfied.”
Merchants have been protesting transaction fees for decades, but they are gaining traction in negotiations because of the proliferation of alternative payment methods.
Account-to-account payments, for example, operate on new payment routes — unlike traditional Visa and Mastercard card systems. They are growing in popularity — they account for 13% of checkouts in Europe, according to a new Accenture report — and Visa and Mastercard also offer their own account-to-account payment services.
Financial services companies like PayPal have been building their own payment systems that don’t rely on established networks. Last month, Citigroup launched a program that allows retailers to access the bank to request payments directly from consumers, bypassing the card system.
“New options are emerging every day, lowering the interchange fee, making it more efficient for suppliers and better for consumers,” said Anthony Thomson, UK president of Zip, Australia’s “buy now, pay later” company.
Many of these payments are made through application programming interfaces, or APIs, such as Plaid, which facilitate secure connections to consumer financial data to third parties.
“It’s clear the future is API-based connections, using bank accounts as a routing hub, rather than using credit cards,” said Keith Grose, director of international at fintech Plaid.
Concerns about the future of the debt business prompted Visa to make a $5.3 billion ($29.7 billion) offer for Plaid last year, but the deal was dropped after the US Department of Justice objected on antitrust reasons. Visa and Mastercard have also started building their own API networks and investing in open banking technology.
Amazon has been experimenting with alternative payment methods that avoid cards. In August, the company said it would offer BNPL (buy now, pay later) facilities to US consumers through third-party provider Affirm, allowing purchases of $50 or more to be paid in installments.
A similar option was created in Germany with Barclaycard, while in Poland and the Netherlands the company worked with several companies to offer direct bank transfers for the purchase of goods.
In addition to resistance from traders, there is also pressure on transaction fees from governments around the world.
The UK Payment Systems Regulator said this month that it was looking into the issue of interchange fees and that it “will step in to resolve any issues we identify”.
The US Federal Reserve said it would review exchange regulations to address advances in payments technology, and analysts expect new rules to be published next year.
The duopoly also faces competition from domestic payment networks in China, India, Australia, Germany and Russia — which are being supported by governments to keep costs down and increase national security, said James Booth, head of partnerships at fintech group PPRO
Meanwhile, efforts are underway to build a European Payments Initiative, which faces significant obstacles.
“There are many alternative payment methods, but given the way the broader payments market is defined there are a number of conflicts that cause new and existing alternatives to struggle to compete with cards,” said Alex Ellwood, senior vice president, CMSPI.
“Card payments feed multiple stakeholders with fee income.”
Translated by Luiz Roberto M. Gonçalves
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