Goliath versus Goliath; Amazon vs. Visa

Background

In November 2021 Amazon announced that it would cease accepting Visa badged credit cards in the UK from January 19 2022, “due to the high fees Visa charges for processing credit card transactions.” On January 17 2022 Amazon announced the proposed ban would not go ahead stating it was “working closely with Visa on a potential solution that will enable customers to continue using their Visa credit cards on Amazon.co.uk”

Visa is the largest scheme in the UK and its logo sits on 90% of debit cards, while Mastercard actually has a larger share of credit cards. Debit is the country’s favourite payment type by transaction volume, though consumers often prefer to use credit cards for larger purchases.

How big is Amazon in the UK?

According to market research firm Wunderman Thompson Commerce Amazon represents over 27% of all UK ecommerce spending, and Statista maintain that 90% of UK shoppers use Amazon, with 40% of all homes having Amazon Prime.

Post-Brexit both Mastercard and Visa have announced higher interchange fees for cross border online payments to the indignation of international retailers, like Amazon. This price adjustment apparently has a market rationale but most observers note that the departure from EU imposed interchange caps of 20bp for debit and 30bp for credit and have enabled the card schemes to raise their rates by around 5 times. Amazon, like most large merchants understand this and feels it’s being gouged.

More broadly the payments industry has been, and remains, a fast growing and lucrative industry with high margins whereas retail in aggregate is a low margin industry. Even when regulators intervene the cost of payments can still increase; the payments consultancy CMSPI has observed, Visa and Mastercard have steadily increased their European charges by introducing new fees since the introduction of the interchange price caps.

So what Happened?

A private negotiation between two heavyweights became a very public fight on 17 November 2021 when Amazon chose to announce that it would cease to accept Visa credit cards from January 19 2022. Amazon went as far as to say to it would offer customers up to £20 to change to a different payment method.

Visa maintains that interchange is a market rate and that the card issuers, mainly banks, are the main beneficiaries of higher interchange. While this is true the retailers’ costs for the same service have increased dramatically.

Since the flurry of press in November the negotiation went back behind closed doors, until January 17, 2022.

The governing thought for retailers around online checkout is twofold; firstly make checkout as simple and fast as possible ( think Amazon one-click checkout ) and secondly offer as many types of payment as you can to increase the chances of the customer being able to at the digital checkout. The better you do these two things the fewer baskets will be abandoned and the more goods you will sell. So Amazon telling its customers that it will withdraw a major payment type in one of its largest markets is a big deal.

Additionally, we’d expect Amazon to have the same issue with Mastercard fees ( very similar to Visa’s), given their importance in the UK credit card industry; it may be that they do, but simply the negotiation has been more flexible. This will become clearer over time.

In the meantime observers have been left wondering whether this very public fight marks a shift in the balance of power in payments?

Alternative Payments and Open Banking

There is a huge amount of change happening across the payments landscape and it’s likely to radically redraw the lines of how we pay in the near future. Particularly important are Alternative Payment Methods, or APMs. An APM is different way of paying from traditional methods such as cash or cards. APM is a broad catch-all that includes digital wallets, (think PayPal), Apple Pay and Buy Now Pay Later (think companies like Klarna and Afterpay). Most European countries have several established APMs which in aggregate are driving transaction volume away from traditional payment methods.

Many of these APMs use the existing banking payment rails which have huge scale and low costs. Increasingly these payment rails are also becoming Immediate Payment rails, so merchants can get paid faster and consumers have a more accurate view of their real bank balance, in marked contrast to credit card payments.

One of the best known is European APMs is iDeal, which is consumers preferred method of paying online in the Netherlands. It allows consumers to make an online payment from their bank account to a retailer or utility.

While APMs are more prevalent in continental Europe than the UK the reverse is arguably the case in terms of Open Banking. From a payments perspective Open Banking allows consumers to securely access their bank account from a retailers ecommerce site and securely make a payment to that retailer. Ecospend, an Open Banking fintech, has helped HMRC collect over £2.4bn of tax revenue instantly online using this method in the last 12 months.

UK-based tomato pay has launched a system that allows retailers to get paid in-store by generating a QR code that allows a consumer to pay instantly by Open Banking. There are several similar system in use across Europe leveraging national Immediate Payment rails.

More broadly the pandemic has accelerated the adoption of digital payments and enabling technologies like QR codes have become much more widely used and accepted by consumers.

All of this is before we consider the impact of crypto currencies and other forms of NFT.

Will consumers be worse off?

Most consumers understand that if something goes wrong with a credit card payment they can get their money back. While standard chargeback rights offer this protection in the UK there is additional protection from the section 75 Consumer Protection legislation for purchases over £100. This level of protection is not present with some of the exciting newer payment methods so consumers could lose out.

It’s likely that APMs will continue to offer merchants lower transaction costs than card payments and with the increasing prevalence of Immediate Payments and Open Banking will also result in more favourable settlement times (access to cash) as well. And this applies not just to the UK and Europe, but in the US and around the world.

Amazon understands all the aspects of this changing landscape, and so do Visa and Mastercard who have invested heavily in this market segment, as they too see the rising importance of Immediate Payments, APMs and Open Banking technology.

Could it be that the threat of dropping Visa in the UK is actually a first skirmish from Amazon as they prepare to use their scale and market power to promote lower cost APMs and by proxy further accelerate the rise of alternatives to card payments?

In Summary

There are a few key takeaways;

1. Amazon bringing this battle into the public domain reflects how seriously it is treating this negotiation. It will doubtless spur other large retailers to consider more aggressive action too, not necessarily with the card schemes but more likely with their acquirers and PSPs.
2. Amazon has put the spotlight on the opaque nature of card acceptance fees and their price increases. This has already provoked further regulatory interest with both the House of Commons Treasury Select Committee (13 January 2022) and the Payment Systems Regulator looking at the rising cost of card acceptance for retailers.
3. Amazon has issues with Visa that it doesn’t seem to have with Mastercard, even though they have very similar fees for the same transactions. How this plays out will be interesting.
4. To this point Amazon hasn’t mentioned Debit Card fees which have experienced a similar price hike, and are the preferred payment method for UK consumers. Its also a payment method dominated by Visa in the UK.
5. Amazon will understand all of this and know that there will be many more payment types and that consumers will be increasingly open to paying by different methods, all of which means it can afford to put more pressure on the traditional card-based payment model in the knowledge that there are an increasing number of credible, lower cost payment methods that are being rapidly adopted by consumers.

For all these reasons we can say the balance of power is shifting, albeit from a very uneven starting point.