Amazon’s ruthless move to block Visa credit cards forces anxious businesses to make stark choices
Amazon’s recent decision to block Visa credit cards in the UK caught millions of businesses and consumers in between.
As a result, many firms have some serious and fairly urgent choices to make, as industry insiders explained to Morning Wire today.
Amazon announced in November that it will no longer accept payments made with UK-issued Visa credit cards from early 2022.
The e-commerce giant said it will block payments from 19 January, thereby impacting millions of businesses and consumers across the UK as some of the country’s biggest banks, including Barclaycard and HSBC, are among those using Visa on credit cards.
Within a day of Amazon’s bombshell announcement, Visa had fallen by 4.7 per cent in stocks and had dragged the S&P by almost a third.
Since then the announcement has continued to send shockwaves across the market as businesses, and consumers, come to terms with what the decision actually means.
Amazon explained the dramatic decision due to “the high fees Visa charges for processing credit card transactions” and many businesses could not agree more: fees are way too high.
Visa, as well as MasterCard and other companies, are looking to increase fees since Brexit took away their 0.3 per cent cap for online cross-border transactions.
“Given that everyone expects Visa and Amazon to strike a deal, the shares continue to suffer,” Chris Beauchamp, chief market analyst of IG, pointed out.
“But perhaps because it throws open a wider issue, namely, the rise in the competition via startups in an area that has previously been the sole preserve of Visa and Mastercard, whose shares are down to today,” he told Morning Wire
Stark choices for businesses
While Visa hit back, saying it was “extremely disappointed” by the decision, the move by the e-commerce giant means a full-frontal attack on Visa, and other card payment processor’s high card fees.
Meanwhile, millions of firms – small and large – as well as customers are caught in between.
For many small businesses struggling to emerge from the pandemic, the cost of the charge terminals and commissions charged are greater than for larger companies and significantly eat into profits, observers have pointed out.
An Amazon spokesperson told Morning Wire today: “The cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers. These costs should be going down over time with technological advancements, but instead they continue to stay high or even rise.”
“With the rapidly changing payments landscape around the world, we will continue innovating on behalf of customers to add and promote faster, cheaper, and more inclusive payment options to our stores across the globe,” he added.
“UK-issued Visa credit card customers will have to either transfer to their debit card or find a new credit card provider if they want to remain an Amazon customer.”
GlobalData payment analyst Chris Dinga
Meanwhile, Adam Taylor, a partner in the restructuring and insolvency team at JMW solicitors, said: “It will be interesting to see how the well publicised Amazon vs Visa battle ends up. Many think this will resolve itself before Amazon otherwise pull the plug on Visa in January 2022 as currently threatened.”
Taylor stressed that “many will have to face the stark choice of whether to offer the facility of accepting payments by card or to insist on cash only. Will that choice affect the viability of their business or risk its survival?”
He added that with so many consumers having been encouraged to ‘tap and go’ and avoid handling cash during the pandemic, many now do not hold large amounts of cash and are reluctant to start using cash again.”
“Will these businesses accept the charges or if Amazon win in their battle with Visa will bodies such as the British Retail Consortium and Federation of Small Businesses be able to take up the challenge?”
“Those bodies have been lobbying for such businesses to have the facility to accept card payments on fairer terms,” Taylor continued.
“Will this all move fast enough to stop these businesses having to make the stark choice of whether to accept payments or not to avoid insolvency?”
Anxious
Meanwhile, the payments industry anxiously follows the battle between Amazon and Visa.
According to industry estimates, around 77 per cent of global online purchases are not made with an international credit card, but with a local payment method, be it wallets or bank transfers.
In the UK, more than half of all payments are card0based, with Visa having an 82 per cent market share of that, according to PPRO research.
Sankar Krishnan, industry head, banking & capital markets at Capgemini, highlighted what this conflict could mean for the future of the Payments Industry.
‘We have seen this kind of competition before in the market, with traditional and well-established payment providers being challenged by large retailers due to their ability to facilitate a more streamlined customer experience,” Krishnan said.
“This recent news shows that embedded payments in the marketplace are fast becoming a reality,” he added.
Krishnan thinks Amazon may have an advantage, in the end.
“As customers are familiar and have more experience with these large retailers and big tech companies, they may continue to emerge as a more trusted payment provider because of the ease of execution, the transparency of pricing and the efficiency and reliability of getting refunded when needed,” he explained.
Post-Brexit end to interchange fee cap
Some observers believe the conflict between the two companies is a direct results of Brexit, as Simon Deane-Johns, a financial services-focused solicitor at Keystone Law argues.
“This fallout has arisen from post-Brexit changes to the UK’s caps on ‘interchange’ fees, which are paid by retailers’ card providers to consumers’ payment card issuers under card scheme rules,” Deane-Johns said.
He said that EEA-based retailers must either set up locally in the UK, which is likely to be too costly or, as Amazon has just announced, stop accepting any cards that attract the higher fees , in their case, UK-issued Visa credit cards.
“Clearly this is not great news for British consumers, but it may prove a boost for non-card payment methods, including ‘open banking’ transfers, direct debits and Buy Now Pay Later.”
Simon Deane-Johns, Keystone Law
For regulatory reasons, Brexit has already caused EEA-based retailers to switch their payment processing relationships to EEA-based payment service providers, often a new EEA company set up by their UK payment providers to separate their UK and EEA businesses).
“But under card scheme rules, this still left their payments from UK cardholders exposed to higher interchange fees because the UK caps on those fees only apply where all the participants are based in the UK.”
Opportunity for MasterCard-issued Amazon cards
Other industry insiders are less convinced Brexit is the driving force behind Amazon’s dramatic decision, as they think it is mostly a calculated move to drive the adoption of the company’s own payment cards, and will give a competitive advantage to Visa’s main rival, Mastercard.
The move sent shockwaves through Britain’s consumer and retail landscape, as the cards of millions of Brits can no longer be used on Amazon’s platform next year. After all, Barclaycard and HSBC are among those using Visa on credit cards.
Currently, Visa holds the second largest credit cards market share in the UK, with close to 20 million cards issued in 2021, according to industry figures from Global Data.
Visa falls fairly far behind market leader Mastercard, with around 38m cards.
However, as both companies are looking to increase fees since Brexit took away their 0.3 per cent cap for online cross-border transactions, Amazon’s decision to only ban one of these companies “seems odd,” according to GlobalData payment analyst Chris Dinga, “until you remember that Mastercard is Amazon’s credit card issuing partner.”
Dinga said: “This represents a unique opportunity for both Amazon and Mastercard, as they can take advantage of the situation to promote the Amazon credit card to customers.”
He added: “UK-issued Visa credit card customers will have to either transfer to their debit card or find a new credit card provider if they want to remain an Amazon customer.”
However, an Amazon spokesperson told Morning Wire today: “Visa is a service provider to Amazon, not a competitor, this action is entirely unrelated to our own payment offerings.”
Loss for revenue for Visa
Finally, Amazon’s interference will mean a significant loss of revenue for Visa in the UK.
Further, if the issue of interchange fees isn’t addressed, there will be ongoing issue for retailers, which will see their profit margins squeezed, Dinga pointed out.
“Smaller retailers may find it harder to do the same if they try to ban Visa credit cards,” he continued.
Credit cards are still dominant players for non-cash transactions, but they need to be aware of the growing competition that buy now, pay later (BNPL) providers and alternative payments such as Venmo represent.
“BNPL is gradually being adopted by retailers as they see higher conversion and growth opportunity by providing it to their customers. High interchange fees could accelerate the adoption of BNPL services by retailers,” Dinga concluded.