Fri. Dec 3rd, 2021

As the year’s biggest shopping season kicks off, Amazon chose last week a very public battle with Visa. It has sent an email to UK customers saying they plan to stop taking Visa branded credit cards and offer them a £ 20 discount on their next purchase if they change payment methods.

This is Amazon’s third recent swing at the global fund transfer business – it also charged co-payments on Visa transactions in Singapore and Australia. The hassle could possibly spread as the companies renegotiate their global transaction on fees and their co-branded US credit card.

It’s a collision of two titans who are both used to getting their own sense. Amazon is steamrolling its way through the world economy, while Visa and its rival Mastercard are consistently some of the highest profit margins in the S&P 500.

But the struggle also underscores the fact that the rapid spread of e-commerce has changed how people pay for goods and services, raising fundamental questions about who benefits from the process. The amounts at stake have risen sharply as the effects of pandemic cards have increased to more than 80 per cent of UK transactions.

Bar chart of Share of UK retail transactions (% of total value) showing that card networks become more important as cash usage decreases

At present, the card payment system is both opaque and uneven. When a customer uses a card, the merchant pays a fee that can amount to as high as 2 to 3 percent of the transaction. An “Acquirer” fee goes to the payment company that connects the merchant to the network, an “Exchanger” fee goes to the bank that issued the credit card, and Visa or Mastercard holds the rest.

Traders can and do shop between acquirers, but small and medium-sized companies have no choice but to pay the other standard rates. This leaves Mastercard and Visa, which are fiercely competing to join issuer banks, free to use the fees to pursue them. In the US, for example, the two networks account for nearly three-quarters of credit card and debit card spending.

Groups like the British Retail Consortium have been complaining for years. They achieved a political victory in 2015, when EU lawmakers limited bank transfer fees to 20 basis points for debit cards and 30 for credit cards. But scheme fees paid to the card networks have risen since then. “It is humiliating that legislation can be so easily sidelined,” said BRC’s Andrew Cregan.

Large retailers have more leverage to demand custom transactions with lower fees, which explains what is currently going on. Amazon claims that it is trying to provide customers with faster, cheaper payment alternatives and reduce costs on Visa’s network.

But the company’s ban on UK credit cards appears to be a bargaining chip rather than a blow to consumer or retailer choice. It hits a segment of the market where Visa has a relatively small share, so it reduces the impact on Amazon’s sales, while maximizing the pressure on Visa to offer better terms.

Visa says it earns its money by maintaining a global network that makes transactions instantly, reduces fraud and saves merchants to deal with non-paying customers. And the UK fees are not noticeably higher than Mastercard’s.

Both networks argue that stores that do not value their services can always reject the cards. It’s a bit rich, given the dire state of the retail industry and the declining use of cash. Some merchants refuse to take American Express, which has even higher fees, but it has about one-tenth the number of global users of the other two.

There is additional inequality built into this system. Outreach banks use the exchange fees to offer rewards or cash back to valuable customers. This means that smaller retailers and regular customers end up subsidizing rewards programs for the smartest and richest cardholders.

The rise of other non-cash payments may disrupt this sociable ecosystem, but it is not yet clear who will benefit from it. Amazon will soon start accepting payments via the US digital app Venmo, as well as bank transfers in Poland and installment plans in Germany. It is well positioned to start weaning customers completely away from the credit and debit card networks. Increasing use of payment applications, such as Apple Pay, also poses a threat to the networks, as customers may skip carrying a physical card and connect directly to their bank accounts.

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But do not count out Visa and Mastercard – they scramble to include themselves in these digital processes as well. Visa presented its “network of networks”, while Mastercard bought several companies specializing in bank transfers and open bank applications. Maybe it will benefit small retailers and buyers, but do not bet on it.

Follow Brooke Masters with myFT and so on Twitter

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