As the world’s largest payment processor, Visa (V, Financial) is constantly under pressure to keep innovating and maintain its edge over everyone else. On the one side, Visa has been expanding its moat through partnerships with other major payment solutions providers and on the other, it has been fighting with large retailers in an effort to save a few percentage points on its margins.
Unfortunately, Visa is not working smart like MasterCard (MA, Financial) is with their foray into ACH payments. Visa wants to go head-on with some of the largest retailers in the world. MasterCard is also caught in the fray, but they are not taking the belligerent route as much as Visa is.
Here is a very brief list of some of the larger brick and mortar retailers that are at loggerheads with Visa and their industry peer, MasterCard, over percentage points and transaction fees:
“Target Corp. (TGT, Financial) and Macy’s Inc. (M, Financial) joined with 15 other retailers in suing Visa Inc. and MasterCard Inc. over credit-card and debit-card fees after dropping out of a multibillion-dollar settlement of a similar case.”
– May 2013 Bloomberg
“Walmart (WMT, Financial) is suing Visa for allowing customers to verify chip-enabled debit card transactions with a signature instead of a PIN.”
– May 11, 2016 USA Today
“Walmart says it intends to join the list of retailers in Canada that don't accept Visa cards, citing high fees for transactions. It's a move one retail analyst has said will cause "pain on all sides."
– June 11, 2016 CBC.Ca
“In its lawsuit, Home Depot (HD, Financial) accused Visa and Master card of trying to block the use of PINs and pushing merchants toward accepting less-secure transactions that earn the card companies higher fees.”
– June 2016 AJC.com.
“Kroger (KR, Financial) is suing Visa over fines the grocery chain said the payment company levied against it for debit-card transactions, specifically because Visa wants Kroger to verify purchases with a customer’s signature as well as a personal identification number (PIN).”
– Fortune June 2016
So it would seem that Visa is making no headway in reaching amicable agreements with any of the major U.S. retailers, which is significantly injuring them. The timing of the three high profile cases from Home Depot, Walmart and Kroger do raise the question: how did all three of them decided to go after Visa around the same time? They have obviously been in close talks with each other on how to handle the situation with Visa and each company seems to have independently taken action based on some sort of consensus agreement.
The key problem seems to be Visa’s insistence on asking retailers to allow cardholders to verify purchases using customer signature instead of only accepting the highly secure PIN based payment system.
Visa wants the retailers to accept both form of verifications - signature as well as Personal Identification number (PIN) - but retailers want their customers to verify debit card transactions using their PIN, not by signature, which they argue as the better way to process payments as signature’s can be easily forged and the person who is verifying can’t be a signature expert.
They do have a point. There are several countries around the world, for example India, where PIN-based verification system has already been made mandatory. Then why is Visa fighting for the age old verification system instead of moving to a new age one?
“Wal-Mart and Kroger say PIN-debit transactions are more secure than when customers sign for the transaction, which can be easily copied. The PIN transactions can also be cheaper for the merchant because they have a choice of routing the transaction among a number of competing networks.”
- WSJ
The answer to that lies in the cost.
When companies use signatures to verify payments, they will have to use the Visa network to process it. When there is PIN-based verification involved, they have more choice and better pricing. Though we do not know exactly how much, Visa seems to be unwilling to give up that hit to its revenues, even if it is only marginal.
The good thing for Visa is that even the mobile wallet industry has accepted their position in processing payments and have all agreed to toe the line with them instead of forging a separate path and cut the company out.
Visa’s problems seem to be mostly with the larger retailers that ring up hundreds of billions of dollars - if not trillions - in sales every year. As Visa’s biggest revenue contributors, this will remain a problem until one side gives in. And that is not going to happen any time soon, from the looks of Visa’s litigation landscape.
Visa is picking fights with so many different companies and it only leaves a bitter after taste in every retailer’s mouth.
The problem is already so big that Walmart led the effort to create an alternate payment system called Merchant Customer Exchange (MCX), trying to bring as many retailers under one roof. But it is yet to take off and has been plagued with many delays.
It is clear retailers already want to see the back of Visa. Though their efforts have not paid off yet, it clearly shows that they will not tolerate tyranny after a point - even if that tyrant is the largest payments processor in the world.
I love the moat Visa has, but being on a collision course with major revenue contributors is not the way to go. Visa is only alienating itself and giving unnecessary reasons for big retailers to build their own payment system. If those efforts succeed, then Visa will have no one else but themselves to blame.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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