Visa vs Amazon – When Merchants Get Leverage

Visa Announces earnings today at 5pm, the big question institutional investors are asking me is about the Amazon – Visa discussions.

Updated 17 Nov

At Money2020 this week and I have to say I’m having a blast. Seeing friends face to face and getting back to “normal” was well worth taking my first plane flight in 20 months.

Visa Announces earnings today at 5pm, the big question institutional investors are asking me is about the Amazon – Visa discussions. It is a big game of chicken right now, with earnings ramifications. To understand whats going on here, let me attempt to give some abbreviated history.

Amazon and all online merchant pay card not present (CNP) rates for processing payments and own the risk for fraud. The “cost” for retailers includes the 30-50 bps of interchange (see CardFellow Blog), fraud losses, fraud management systems, people to manage, …etc. Large online retailers have greatly benefited from 20+ yrs of consumer behavior and advanced data science to manage fraud down to around 3bps. While much of the rest of the world has implemented things like 3DS/VBV/MSC to shift liability to banks, US merchants (and Amazon) has been consistent in asking for “risk based interchange” from V/MA. Their challenge has been that issuers have the “control” over V/MA and neither networks nor Issuers have any upside in leveling the interchange (my old blog Cardholder present).

Amazon has an amazing team. Quite frankly they are they best managed business, with fantastic people aligned in common objectives. I feel priviledged to have had them as a Starpoint customer. This is a team of payment “rocket scientists”.. So.. how can Amazon gain leverage?

First let me digress. In March 2015, Visa and Citi won the Costco business. For those that don’t remember, Costco was a 100% Amex merchant with no other cards accepted. To win this deal, Visa not only provided incentives for the Costco Card, Costco negotiated the same rate on all Visa cards. Issuers were not thrilled with this deal, but they didn’t throw up a stink because their cards weren’t accepted at all, and accept all Visa cards helped to ensure their current cards would be accepted (vs Consumer applying for new card with Citi). Amazon’s team saw an opening.. and though.. hey.. we should probably launch our own co-brand.

In January of 2017, Amazon launched a co-brand card with Chase (5% cash back). This co-brand was not only revolutionary in cash back, Amazon was able to negotiate a discounted rate on ALL VISA CARDS with Visa to win this business (vs Mastercard). The other Visa issuers were absolutely furious.. Visa (with Chase’s support) just unilaterally cut their interchange revenue with Amazon with no upside. Sure Visa won a co-brand but is was the other issuers that paid for it. There were issuers preparing to bolt to Mastercard, and it took tremendous exec attention and marketing funds to calm things back down. One rumor is that Visa wrote a note promising issuers that it will NEVER negotiate interchange with a merchant again.

2021.. The Amazon Visa-Chase Co-brand is not the 4th largest in Visa. It is also now up for renewal. Can you guess what Amazon is asking for? Yep.. they want risk based interchange and rates comparable to Wal-Mart’s card present. Who will blink first?

If Visa acquiesces to Amazon’s demand, there are issuers that will bolt to Mastercard. If Visa doesn’t give, then Amazon will get what it wants form Mastercard (JPMC will probably still issue). From my perspective the risk for Visa to give in to Amazon is greater as other merchants will seek to follow this same playbook. Thus I see loss of the Amazon co-brand and a win for Mastercard.

—Update 17 Nov —-

Amazon just announced plans to stop accepting Visa cards in UK. This is a brilliant move by Amazon! Merchants have a strong case on reducing the CNP disparity and fighting the fee increases taking place on card networks. Stopping acceptance of V cards (in UK) puts direct pressure on the issuers. My guess is that V supports Amazon’s request for fee reduction, but V is blocked from action by the issuers. This sends a clear message to issuers. Next step for Amazon? tell consumers about what it is that Amazon is fighting for and then ask them for their ACH information.. give these ACH customers 5% back on every purchase. This will be the next shoe to drop..

11 thoughts on “Visa vs Amazon – When Merchants Get Leverage”

  1. Spot on Tom. And Amazon can afford to heavily incentivise to customers to move to open banking-initiated payments in the UK, which would of course give Amazon access to customer bank account data (with the customer’s permission, which will be readily granted). The European banks have been complaining to the regulator that this will create unfair competition – and they are right. The surprise, to my mind, it that it has taken so long to get to this point.

    1. I can’t see Amazon moving a large proportion of payments to open banking yet – no 1-click, checkout abandonment would be very high compared to cards today (no SCA exemptions). This will require delegated authentication. This is more about price negotiation, and UK issuers refusing to give up the cross-border interchange they’ve gained from Brexit. They should get some sign-ups to their cobranded Mastercard from this 🙂

    2. In the same way I won’t use my debit card with Amazon, why would I use my bank account? The risk is the same in the event of a data breach (which seem to occur with regularity). And do I want Amazon poking around my current account to offer me loans, insurance etc. You and I have had this discussion many times, around the access to data and how the real losers are the banks. But I’m yet to be convinced that Open Banking will be the solution. I’ll just use my Mastercard until such time they stop that.

  2. This blog is amazing.

    If V does not lower their interchange vs Amazon due to pressure from issuers, why would MA be able to?
    And if we draw the line further, won’t this have LT consequences whereby every 3 years pricing is compressed for both?

  3. V/MA credit cards provide a walled garden for some security in the perspective of account holders.

    Access to (bank) account is the holiest of holies and UK account holders’ trust levels are at their lowest ebb with hacks, fraud and APP scams a daily headline – that headline being that UK banks are slippery as eels when it comes to bearing liability and recrediting customer’s APP losses. No one wants that pain.

    So I also think 5% won’t be enough for the significant majority, but if anyone can get that ball rolling in the UK it’s Amazon.

  4. “Next step for Amazon? tell consumers about what it is that Amazon is fighting for and then ask them for their ACH information.. give these ACH customers 5% back on every purchase. This will be the next shoe to drop..”

    When this shoe drops it will be a bang. Assuming Amazon does it with good UX and gives users more options, like integrate directly with Venmo, Zelle, CashApp, PayPal, and ACH.

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