Merchant card bans have to get larger to gain leverage

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News broke recently that one of Kroger's brands in California is going to stop accepting Visa credit cards due to the fees assessed by the global network.

While this could refer to any component of the costs related to Visa acceptance, it likely is related to interchange fees. If you think this is shocking and unprecedented, think again.

Walmart Canada did something similar a few years ago. It dropped Visa cards in select small stores across less populated areas, yet continued to advertise the alternative card brands that were accepted in those stores. Visa responded by promoting all of the other stores in the region where its cards were accepted. Walmart slowly expanded the ban in the months that followed until the parties negotiated a settlement.

Also of note, Kroger sued Visa about two years ago after the grocery giant claimed Visa began fining Kroger for requiring customers to authenticate with a PIN at checkout. Forcing an authentication method was a violation of Visa’s rules; though it may give more routing options to a merchant, it also creates a disjointed customer experience.
While Kroger, Walmart and other retailers incur considerable costs to accept card payments, their stores achieve tens and hundreds of billions in sales that, based on research, would not be possible without cards.

Such data reveals retailers’ razor-thin margins; a valid point for many of them, though less so for mega-chains where scale is used as a multiplier for those margins. Interestingly, while many retailers claim that the costs of card acceptance are ultimately borne by consumers, a recent study by the Federal Reserve Bank of Richmond found little evidence to suggest that merchants reduce prices as their card acceptance costs decrease.

With the singular focus of many consumers today being convenience, additional friction in their purchase path creates a negative perception that’s usually assigned to the retailer. In a period where many retailers make significant investments to achieve 1% growth in same store sales, dropping the largest U.S. credit card network is a significant risk. It is doubtful that Kroger’s leadership did not understand this gamble. Expect Kroger to closely monitor the effects on sales and the customer experience.

Kroger may have to expand the boycott to a more meaningful portion of its 3,000 locations before creating enough leverage for Visa to negotiate.

If this tactic spreads beyond Kroger, concern would certainly escalate for Visa and its issuers. However, be assured that Visa also knows the risk is not only on their side of the dispute. Consumers, who often understand little to anything about the fees retailers pay to accept cards, will not care about the details of the fight and will place their displeasure solely on the shoulders of any large retailer that elects this strategy.

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