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Visa has the dominant position in Amazon negotiations

Amazon banned Visa credit cards in the UK due to high interchange fees
Visa has the dominant position in Amazon negotiations
  • Visa is not very reliant on Amazon because of market dominance
  • Alternative payment services still far away from competing

A heavyweight battle between two of the world’s most profitable companies has spilled over onto UK shores. Amazon (US:AMZN) announced that from 19 January 2022 it will no longer accept Visa (US:V.) credit cards issued in the UK due to the high fees Visa charges for processing credit card transactions.

The decision by Amazon is the latest in a list of attempts made by large retailers to bring down these fees. In 2014, Walmart (US:WMT) sued Visa for $5bn for charging ‘unreasonably high’ fees and earlier this year Amazon introduced a surcharge on Visa transactions in both Australia and Singapore.

When the UK was in the EU, credit card interchange fees were bound at 0.3 per cent by the European Commission. Last year, Visa reportedly decided to increase its fees on cross-border transactions to 1.5 per cent. This decision was mirrored by rival Mastercard.


Amazon trying to increase pressure on Visa

Visa and Mastercard (US:MA) effectively have a payment duopoloy in the UK. Mastercard has the largest market share with 38m credit cards issued in 2021, while Visa is in second place with 20m cards issued, according to Global Data.

Given that both Visa and Mastercard raised fees together, Global Data analyst Chris Dinga said that Amazon's decision to ban only one of these companies seems odd, "until you remember that Mastercard is Amazon’s credit card issuing partner”.

“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,” Dinga said. Amazon offers both a Platinum Mastercard and an Amazon Classic Mastercard in the UK.

Amazon also currently has a similar deal with Visa in the US but is reportedly considering dropping this, according to Reuters, which said it is currently in talks with Mastercard and American Express. Adding to the growing competition for Visa, Amazon also signed a deal earlier this year with US-based buy-now-pay-later service Affirm and signed a partnership with third-party payment platform Venmo, which is owned by PayPal (US:PYPL).

Since Amazon’s announcement Visa’s share price has fallen by 8 per cent.


Visa in dominant negotiating position

The reason why Visa and Mastercard have such dominant positions is their strong network effects. Both card companies have established relationships with the major banks meaning retailers need to accept them otherwise they will miss out on a huge amount of business. Visa currently has 2.5bn cards in use and processes more than 100bn transactions a year.

Visa has an operating margin of 66 per cent, the fourth-highest in the S&P 500, which means its earnings are not very sensitive to a fall in sales. Ken Suchoski a payments analyst at research firm Autonomous, thinks the fall in Visa's share price is an overreaction to the news.



“If the Amazon co-brand portfolio flipped to Mastercard, we believe the earnings impact to Visa would be less than 1 per cent”.

Visa's scale makes it unlikely that Amazon would ever look to ban its cards permanently. “In terms of the coming negotiations, I think we will find that Amazon is more dependent on Visa than the other way around. Amazon's strategy will largely be to encourage regulatory scrutiny over interchange fee regulation in the UK,” said Thomas Cecil, founder of multiple payments companies in the US.

Amazon has a lot to gain from regulatory pressure on interchange fees. The ecommerce retailer has an operating margin of just 4.4 per cent, meaning that if costs remained constant, even a small  rise in its revenue would correspond to a decent uplift in operating profit.   


Other challengers to Visa and Mastercard still far away

While the drop in Visa’s value is about the business it could lose specifically from Amazon, this situation has also highlighted future competition to its dominant business model. “The moat around the business is still significant but a few cracks are starting to show. We now have buy-now-pay-later [like Affirm], plus account-to-account services [like Venmo], there is also now cryptocurrency and DeFi, but who knows how that is going to play out,” said Suchoski.

Affirm and Venmo are still tiny in comparison with Visa, though. Affirm currently has just 8.7m active customers while Venmo has around 80m. That’s 0.3 per cent and 3 per cent, respectively, of the number of Visa cards currently in circulation.

“Given how many parties have strong economic interests to keep the interchange model around (not just traditional banks but many software companies who monetise on payments), I would not expect card payment alternatives to have enough market share for a national retailer to separate ties from the card networks," said Cecil.