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Amazon threatens Visa and Mastercard’s credit card domination

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Visa and Mastercard

American Express used to offer an air of exclusivity. The Gold, introduced in the late 1960s, was targeted at “big-spending members” before the more sought after Platinum came two decades later.

But AmEx came with higher fees. It led to hundreds of restaurants across America boycotting the cards in 1991 and encouraging the use of Visa and Mastercard. Dubbed the “Boston Fee Party”, it pushed AmEx to climb down on charges and accept a broader network of merchants.

Now, Visa is being hit by a similar revolt against what Amazon views as excessive card fees. Starting next January the retail behemoth will no longer accept British customers’ Visa credit cards, such as those from Barclaycard or HSBC, as it attempts to strongarm the firm into cutting fees.

Behind 98pc of retail card spending in the UK is one of two networks from US giants – Visa and Mastercard, which dominate the global credit card industry.

With consumers ever more reliant on online retail, this duopoly could be coming under threat, while rival payment methods such as buy-now-pay-later (BNPL) are also gaining popularity.

Dungan Barrigan, chief product officer of GoCardless which develops technology for companies to avoid card payments, says Amazon’s decision “is part of a shift away from the duopoly, away from card payments and towards more direct payments that cut out the intermediaries”.

Visa and Mastercard’s networks facilitate money transfers between banks and retailers, checking them against fraud or failure. Fees, normally around 0.2pc for debit and 0.3pc for credit, go to the card provider or bank, and 0.1pc is taken by Visa or Mastercard.

For some payments this is even higher, with “interchange” fees for those between the UK and the EU on Visa and Mastercard increased to 1.5pc last October, post-Brexit. Retailers have long been frustrated with these costs.

“With retailers now spending over £1bn to accept card payments, it is no surprise many are frustrated by these surging fees,” says Andrew Cregan, payments policy adviser at the British Retail Consortium. “Ultimately, it will be consumers who suffer higher prices unless these spiralling costs can be brought to heel.”

While AmEx faced competition from rival card networks promising cheaper fees, Visa and Mastercard now face new forms of credit and money transfer and giant retailers, such as Amazon, with significant leverage. Amazon has already added surcharges to Visa purchases in Singapore and Australia, citing rising costs.

“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.”

With nearly a $2 trillion market cap, Amazon could lend clout to similar protests from other retailers. Rivals Kroger and Walmart have both previously banned Visa credit cards to force it into better deals. Amazon will, however, continue to accept Mastercard credit cards in Britain, which outnumber Visa’s credit arm in the UK.

Meanwhile the surging popularity of BNPL apps, which break down purchases into three or four chunks, could mean consumers avoid using traditional credit card infrastructures and rewards on offer from banks. Amazon has been working with BNPL company Affirm.

These firms charge their own fees to retailers but can avoid some card processing costs, and in some cases all Visa or Mastercard charges, since consumers can pay off their BNPL credit using bank transfers.

While the BNPL market remains small against credit cards, their popularity among younger buyers is growing rapidly.

According to data from Bain, £6.4bn in transactions were recorded over the last 12 months in the UK with BNPL, growing around 70pc when compared to the previous year. Credit cards grew at just 5pc per year, to £153bn.

Balances held by credit card users have also fallen sharply since the pandemic, down by around £10bn since February last year, while peer-to-peer transactions have grown in popularity with PayPal boasting 400m users.

Meanwhile, it has become easier for retailers to plug-in software that allows them to directly take bank transfers such as California-based Plaid, valued at $13bn, allows merchants to connect directly to bank accounts.

Changes have not gone unnoticed. Last year Visa made a $5.3bn bid for Plaid to diversify from its card network, which was blocked by US regulators who warned it would create a “monopolist in online debit transactions”. It has also been developing its own direct payment systems alongside its card offerings.

Visa argues that cards still offer added protections and that it prevents around $25bn in fraud each year. Chief executive Al Kelly described Amazon’s attack to the Financial Times as “odd” and a “threat to punish customers” amid “challenging negotiations”. A Visa spokesperson said: “When consumer choice is limited, nobody wins.”

Certainly, some Amazon customers appear sympathetic to this view with many taking to social media to say they were annoyed about changing cards, or worried they would lose the added protection and offers of rewards.

In its dispute with Amazon, Visa may ultimately come to a deal on its fees. “Visa may need to follow American Express’s example,” Evercore analysts said in a note, and cut its costs in the face of a fee revolt.

But Barrigan, of GoCardless, says the shift away from card payments is gaining momentum and Amazon is just the start: “Merchants are starting to take note and are using it to overcome that duopoly.”

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