The tumultuous relationship between Amazon and Visa hit the headlines last week as Amazon announced that from January 2022 the e-commerce merchant will stop accepting Visa credit cards issued in the UK. Not only did Amazon break the news by emailing their customers who primarily use the affected Visa credit cards – such as HSBC and Barclaycard – on their platform, but they also offered a £20 gift card to incentivise customers to make the switch before the January deadline.
Despite appearing abrasive on Amazon’s behalf, it reflects an ongoing dispute between the two global titans. Amazon has already curtailed the use of Visa credit on its platform in countries such as Singapore and Australia by surcharging their transactions. Similarly, there is well-founded speculation that Visa will be dropped as a partner on the co-branded Amazon credit card in the US. However, the UK-wide ban on surcharging meant Amazon employed different tactics by refusing to accept the card type altogether.
Visa’s response, suggesting fee increases are down to increased fraud prevention investments and that Amazon’s decision threatens consumer choice, were quickly quashed by Amazon. A spokesperson asserted that the corporation already ‘invests heavily’ in protecting its customers.
‘The cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers’, an Amazon spokesperson said, ‘these costs should be going down over time with technological advancements, but instead, they continue to stay high or even rise’.
Amazon claims that interchange fees lie at the heart of this dispute. Interchange fees are fees merchants pay to accept card transactions. Despite being paid to issuing banks they are set by card networks such as Visa and Mastercard. Prior to Brexit, EU regulation kept interchange fees low by capping them at 0.2% and 0.3% for debit and credit cards respectively.
However, following the UK’s departure from the EU, Visa and Mastercard drastically increased their interchange fees to 1.15%-1.5% for cross border transactions. Any increase in the cost of payments hits merchants the hardest – especially in recent years as card payments have usurped cash, with COVID-19 only solidifying this trend.
Last March, Visa crept past JPMorgan Chase to become the worlds most valuable financial services firm. This was significant in the world of finance – a company that represents a mere cog in the finance system has become the largest player in it.
However, Visa’s ‘enormous’ operating margins – estimated to be over 65% – make it hard for other financial service firms to compete. In 2020, only two listed companies had higher margins. Even Amazon, the worlds second-largest e-commerce platform after Alibaba, has a meagre 6%.
Visa’s success is rooted in its dominance within the card payments system. High barriers to entry, economies of scale, and the proliferation of cards as a payment method have created an amenable environment for Visa and Mastercard to grow their revenue while maintaining low costs. For example, there is now one Visa card for every two people on earth – this makes it extremely hard for smaller card networks to compete.
Despite their lucrative profit margins, Visa and Mastercard have continued to raise their transaction fees. For decades, merchants have been forced to acquiesce to fee hikes – coming to the cogent conclusion that accepting Visa and Mastercard cards is integral to any business.
Amazon’s latest move could portend a shift in this mentality among merchants. Instead of accepting extortionate card transaction fees as a given, merchants may begin to re-evaluate their payment options. The dynamic payments landscape is accommodating to this – fintech companies are searching for alternative payment methods that bypass the big two altogether. For example, bank-to-bank transfers are popular in Sweden and India – they allow payments to take place directly between buyers and sellers without any intermediary players.
Similarly, governments may enhance competition by creating national or regional lookalikes. This stems from a general malaise that payment ecosystems, and therefore a functioning economy, are so reliant on two US corporations. In a bid to boost national security, places such as Australia and the EU are planning initiatives that would aim to weaken the influence of Visa and Mastercard. Similarly, regulatory bodies, such as the UK Payments Systems Regulators, are looking to intervene where possible to ensure payments are fair and competitive.
History suggests that merchants can make a lasting impact on payment costs. In the US in the 1990s, a boycott against Amex in response to rising rates of accepting the card led to a reduction in Amex’s card transaction fees. However, this will require a critical mass of merchants cooperating to ensure Visa feel the effect – something that may be difficult to coordinate in practice.
There is also a realistic chance that this is a global game of chicken between the two corporations. A Visa spokesperson has lent credence to this by suggesting that Visa is continuing to work with Amazon to prevent ‘Amazon-imposed restrictions come January 2022’ and that they are ‘clearly in a challenging negotiation’. With Amazon representing just 1% of Visa’s payment volume, terminating the relationship may hit Amazon harder while barely leaving a dent in Visa’s portfolio.
If this is all a part of Amazon’s negotiating tactics, it may be able to secure lower fees for itself but it’s unlikely these benefits will be extended to smaller merchants that usually pay the highest costs and, therefore, need it the most.
About the author: Jessica Culnane is a contributing Features Writer with in-depth knowledge of policy, politics, and economics. She’s interested in technological advancements, business developments, data, and culture.