Incentives – How will Visa Amazon Play Out?

I outlined the Visa Amazon dispute in my blog 4 weeks ago. Today, Visa is confidently projecting it can bring the issue to a close. For the exec team to communicate confidence, my presumption is that they have both a primary strategy and a fall back strategy.  Given that the big players influence payments so heavily, let me lay out a few scenarios on how this could wrap up. 

The carrots:

    1. Incentives (to either Merchant or Issuers)
    2. Volume Tier Discount – Normally through VPP (see blog)

The sticks:

    1. Card Acceptance (No Visa UK Cards)
    2. Surcharge (UK/SG)
    3. ACH Schemes (Venmo, India, Germany, …)
    4. New Credit Schemes (Affirm)
    5. Accelerated Growth of Co-Brand

Scenario 1 – Volume Tier Discount – Visa Issuers Acquiesce 

As the largest eCommerce merchant in the world, it would make the most sense for Visa to create a new Volume Tier Discount for Amazon. My guess is that Amazon obtained a significant discount when it first awarded Visa/JPMC the co-brand 5 yrs ago (think 40-60 bps on credit, with no “on us” costs for co-brand on Amazon). My guess is that Amazon is now asking for another 30-40 bps ( ~110bps rate) on Visa cards.  Withing VPP, large issuers are typically made “whole” from the impacts of the discounted rate through incentives (now ~26% of Visa’s gross revenue).   

Per my blog, it will be quite costly for Visa to absorb 100% of the impact of an Amazon rate cut in VPP and would need to pass “some” of it through to issuers. The problem is that 5 yrs ago, Visa is rumored to have promised (in writing to issuers) that it will never discount interchange (again). Historically, the top issuers could care less whether Visa keeps Amazon c0-brand, and are not at all interested in giving interchange revenue away. Issuer’s option? Threaten Visa with a shift of card portfolios to Mastercard. 

My assumption is that Amazon, Visa and JPMC (Amazon’s co-brand and acquirer) are aligned. They are now working to communicate the larger strategic threat to Visa issuers should they fight a volume tier discount. Thus Amazon’s brilliant strategic moves 

    1. Surcharges on Visa cards in Singapore and Australia
    2. Stopping the acceptance of UK issued Visa credit cards in UK (~7% of purchases)
    3. Enabling pay with Venmo (which is equivalent to ACH payments)
    4. Enabling Affirm
    5. Visa backing of Affirm’s new Debit+ card
    6. The threat of a New Amazon Chase co-brand on mastercard with instant enrollment

My guess is that a volume discount tier will happen, but Visa first needs to get top issuers on board (particularly Cap One, Wells and Bank of America). We will see Visa’s marketing incentive line tick up substantially in next 12 months. 

Scenario 2 – Incentives to Amazon

The “easiest” option to negotiate is one you control. Today Visa could give Amazon the incentives it seeks through rate reduction within direct incentives… These would also wrap around the co-brand renewal and other requirements ( no surcharging and UK card acceptance ). The upside for Visa here is that the effective “discount” will last only as long as Amazon complies with the terms of the agreement. The downside of this incentive approach is that Visa will shoulder 100% of the cost of the program.  

There would be no impact to issuers, beyond the growth of the Amazon co-brand card. Important to note that JPMC wins in either of the options above, and are thus likely partners in Amazon’s plans. 

Scenario 3 – Interchange Armageddon 

Volume discount with no incentive offset. Of course top issuers would respond that they will shift portfolios to MasterCard, but Amazon has proven its willingness to block a card, and today Mastercard credit is roughly 6% of Amazon volume. Visa has much more to lose in this approach (near term US GDV), and I doubt it would happen with the top 2 issuers. But the future of interchange seems certain. 

As I’ve often stated, the innovation of V/MA schemes is not technical, but rather the economic construct that allows thousands of businesses to invest billions in their network. I see interchange is a key stumbling block to the growth of Visa/Mastercard and THE KEY CATALYST for other alternative networks

Interchange is the Merchant’s cost for making consumer credit available. Merchants admittedly benefit from the availability of consumer credit. However, Merchants universally complain that they are paying for rich reward programs that do nothing for them. How can market forces work within the V/MA networks? Historically, all changes to V/MA pricing have been driven by regulators.  For example, Europe, Australia/NZ and others have seen regulators cap interchange. 

Within Europe, issuing banks suffer the primary impact of this fee reduction ( minimal impact to network fees). In 2011, the US saw Durbin remake Debit interchange. My view is that the future of US interchange (reduction) is certain, the question is: WHEN will it happen and whether the banks will collaborate to preempt. For anyone wanting more detail, I discussed payment market forces in Changing Economics of Payments (2015).. 

Amazon, Walmart and others clearly see a future of reduced interchange and have negotiated brilliantly to make it so. The differences in CP and CNP rates make no sense, and rate changes have been stymied. For instance in 2014, the advent of network tokenization allowed creation of a new “Card holder present” rate tier that would allow the US to catch up with EU and Asia in 3DS liability shift AND reduced rates. Why didn’t it happen? Issuers were effective in squashing it.. They had no incentive to change, only lost revenue. What will force issuers to act? 

    1. A real threat to their consumer credit model? While no where near scale today, new credit models like BNPL are quickly evolving to compete with Cards, a model where there is no “interchange”.
    2. A new card model like Affirm’s Debit+ where a consumer can keep their bank account and a new credit provider can selectively finance transactions
    3. ACH driven models like Venmo, or Plaid’s A2A. 
    4. Powerful Brand that is willing to create their own card (Apple, Amazon, Target, …etc)
    5. Fragmentation of consumer relationship (Neo banks)
    6. Integration of alternate payment schemes into shopping/mobile (Shopify, Stripe, …)

Like every other service, consumer lending is being redesigned. There is no longer one card, one rate, one consumer experience. The decision for large issuers is clear. My view is that V/MA will win regardless of what the issuers decide, but only if they begin to recognize that interchange cost reductions are key to their network’s long term success. 

4 thoughts on “Incentives – How will Visa Amazon Play Out?”

  1. Great blog Tom. I agree with you that V/MA will win regardless of what the issuers decide if they start with the interchange cost reductions. If this turns out to be true, however, it’s my understanding that the networks’ costs will start to become relevant on the issuers’ cost structure. I’m worried V/MA won’t have pricing power to keep increasing yields or their level of margins in this scenario of lower interchange fees.

  2. I suspect Visa will cave to Amazon, and make it up on the backs of smaller merchants, as has been done so many times before. The court case seems to be dragging on, and that or congressional action are likely the only ways to get an across-the-board cut. Especially after the pandemic, many small sellers have jumped on board the V/MA train, although I also see a big increase in Venmo, largely at the expense of checks and cash. Faster Payments would also be an effective competitor, although we will have to wait for FedNow (not that far off, now) for that to be realized. I agree that interchange is coming down in the U.S., I just don’t see this as the trigger. Visa will wait until it is mandated.

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