Visa Sold Down the River

Amazon set to disrupt payments after retail?

IF YOU LIVE in the UK and your shopping habits are anything like mine, you might have received an interesting email from Amazon last week, writes John Stepek at MoneyWeek magazine.

From 19 January next year, Amazon won't be accepting Visa credit cards (debit cards are still okay). To compensate users, they're offering £20 (Prime subscribers) or £10 (not Prime subscribers) to set your default payment method as being a debit or non-Visa credit card.

This might seem minor. The UK is a significant market, but still a small one. And there is a domestic Brexit-related angle to it all.

But none of that explains why Visa's share price slide by about 5% on the news.

And that's because this goes a lot deeper than just a local spat.

On the surface, this story of Amazon barring Visa credit cards can easily be dismissed as little more than a side-effect of Brexit, and plenty of outlets have done so. How so?

In 2015, the European Union capped the level of "interchange" fee that Mastercard and Visa could charge. In effect, this is like a road toll – it's a charge for using the payment processing system. The credit card companies don't get the fee – the banks involved in the transaction do.

With the UK having left the EU, the pair were able to duck out of the cap. Interchange fees on credit cards went up from 0.3% to 1.5% for payments made across borders.

Now, as economist Julian Jessop notes on Twitter, the UK regulator – the Payment Systems Regulator – could easily have capped fees instead. So while this has been made possible by Brexit, it didn't have to be.

So far so good. But the obvious question then is: why is Amazon targeting one and not the other? Well, this is where – having made a point about Brexit – some of the news coverage on the topic rather peters out.

Yet as always – and as the Visa share price reaction demonstrates – it's a bit more complicated than this. Amazon has already introduced surcharges on Visa usage in Australia and Singapore. And, as Michiel Williams reports in City AM, businesses generally are fed up with high transaction fees.

So one aspect to this is plain old negotiating tactics. If Amazon wants better rates or some other deal from Visa, then it is certainly big enough to try.

But there's more to it than that. Mastercard and Visa have in many ways been an effective duopoly. But competition is creeping up. A big part of the point of the whole "fintech" space and blockchain etc is to provide wider, cheaper options for transferring payments, particularly across borders. Cutting out the banks to improve efficiency and cut costs is the whole point.

So the fact that Amazon now feels that a public dispute like this is worth having points to how far this sector's evolution has come.

I mean, think about it in broader terms. You've got one of the most powerful retailers in one of the biggest retail markets in the world (shopping is yet another area in which the UK punches above its perceived weight) telling one of the Big Two credit-card providers where to shove it.

And bear in mind, this is Amazon we're talking about here. Amazon has mastered the art of one-click ordering. Its goal is to reduce the time between the impulse to buy and the fulfilment of that impulse to zero or less. This is not a company which makes the decision to put hurdles in the way of its customers buying stuff lightly.

So as far as Amazon goes, the potential reward for taking this risk has to be high. And clearly it deems the risk of giving its customers the nudge towards using or considering other payment methods worth it in this case.

What does all of this tell you? It tells you that the balance of power is shifting, and that the spectacular margins which Visa and Mastercard have been able to command – 60-70% at the EBITDA level, notes Lex in the FT – are very likely at risk.

As Lex adds, it's notable that Visa's marketing costs have risen sharply as have Mastercard's. When you're having to spend on advertising, that's proof that your market is becoming more competitive. It might not happen today and it might not happen tomorrow, but "the good times are coming to an end for one of business's most enduring duopolies", says Lex.

It's ironic that Amazon – the great disruptor – could be doing for the payments system too.

What does it mean for your money? I think investors in Visa are right to be concerned. This spat might get resolved before the January deadline, but at least some of the money pouring into the fintech and crpyto space has to stick.

As for what you might want to invest in instead, that's trickier. This is a youthful sector and there's so much out there.