The ever so public negotiation between Walmart Canada and Visa is getting even more public and vicious.
In response to Walmart’s press release announcing Walmart will terminate its relationship with Visa, Visa issued an open letter stating that Walmart “is unfairly dragging millions of Canadian consumers into the middle of a business disagreement that can and should be resolved between our companies.”
While we find Walmart’s decision unfortunate, we find Visa’s position disingenuous. Walmart’s only leverage in its negotiation with Visa is the retail purchasing volume its customers bring to the table. Why should Walmart voluntarily handicap itself in the negotiation?
The only other leverage Walmart has, is to influence public policy and demand regulation. Visa is equally vehement that regulation is unnecessary because retailers have a choice as to whether they want to accept Visa or not. Walmart is simply proving Visa’s point. Visa can’t have it both ways.
Is Walmart’s threat real?
While we believe Walmart is leaving plenty of room and time to reverse its decision, we also believe Walmart may be willing to follow through on its threat for the following reasons:
- This is a proxy war: It sets a serious precedent for Walmart’s negotiations with Visa in the United States which is currently mired in court battles.
- There is precedent: Costco is a retailer with significant retail volume that only accepts one network, MasterCard in Canada, and Visa in the United States. Costco is doing just fine. Why can’t Walmart do the same?
- There is an obvious incentive: Walmart will cut a cost out of the equation and replace it with less expensive payment costs such as debit and Mastercard which charge less.
- There is a less obvious incentive: Walmart has its own MasterCard credit card portfolio, which will likely see a massive bump in growth. When Costco Canada converted from Amex to MasterCard it took in well over 1 million applications for its new Costco MasterCard in the first few months alone. There’s no reason to believe Walmart customers won’t do the same. The only question is their credit worthiness.
- Easier for banks to adapt: If this becomes a trend, credit card issuers will take note. You will start to see issuers offering a MasterCard and Visa Aeroplan credit card, Scene card, Air Miles credit card etc, so that consumers can continue to consolidate their spend in one rewards program – lessening the impact on consumers.
- Easier for customers to adapt: It’s easier than ever for customers to have a MasterCard, Visa and debit card. Every Canadian bank offers all 3 payment platforms, and mobile payments, such as ApplePay, do as well.
If customers get used to carrying both a Visa and MasterCard, and become indifferent, that will truly be a threat to the networks. At that point retailers have all the leverage to ask for the best deal from one netowrk or the other, for the entirety of their credit card volume.
How realistic is that scenario? Pretty realistic, if you can imagine a world where Canadian banks automatically issue you two credit cards, considered one account, with one statement, when you apply for a credit card.
Why is Walmart doing this?
Despite Walmart saying they are doing this because “we are taking a stand for our customers because Visa’s high fees can result in increased prices,” this is not about the customers.
In fact most customers benefit from higher interchange fees in the form of rewards. That 2% cashback card you’re using at Walmart is in large part funded by the fees charged by Visa and MasterCard. So consumers are getting something out of the current arrangement. Of course if you use cash or debit, you’re not making out as good as those using a credit card.
So what happens if Visa drops those fees to .8%, does the consumer benefit? Maybe yes, maybe no, it will be entirely up to Walmart as to whether they pass on the savings to the consumer or they use it to increase their margin. Walmart wants to dictate how it redistributes it’s savings.
In the European Union, regulation passed in December 2015, limiting fees charged to retailers by the networks to .3% compared to the approximately 1.2% Walmart is paying in Canada. Australia has lowered interchange fees dramatically through regulation
So did European consumers benefit? Not exactly, credit card issuers increased their fees and reduced credit card rewards to compensate for their lost revenue streams. Perhaps worst of all, consumers have not seen a corresponding drop in retail prices.
These are exciting times. We’re happy that Walmart and Visa are fighting it out in the marketplace, as opposed to the courts or the regulators office. Now we’ll truly see who has the leverage. We can just hope that Canadians don’t suffer in a proxy war that has a lot less to do with us, than the much bigger market that’s at stake south of the border.
In the end, we think both parties will come to a negotiated settlement, because both have leverage. Although without knowing what interchange Walmart is seeking, it’s hard for us to evaluate the cost of war, versus the cost of peace for either party.