Kroger, Visa battle over interchange heats up

Beginning Aug. 14, 2018, Foods Co. Supermarkets, a unit of The Kroger Co., will no longer accept Visa Inc. credit card payments, unless the two parties reach an agreement to reduce interchange fees the card brand charges Foods Co. The ban will impact 21 stores and five fuel centers located in California. Acceptance of Visa debit and other major credit cards, including Kroger's Mastercard-affiliated rewards program, will remain in effect.

Kroger spokesman Chris Hjelm told Bloomberg that Kroger, which operates 2,800 retail food stores under various banner names, could expand the ban to other stores. He added that when the amount retailers pay in card fees "gets out of alignment, as we believe it is now, we don't believe we have a choice but to use whatever mechanism possible to get it back in alignment."

According to market data, Kroger's five-year quarterly profit margin has averaged 1.86 percent, slightly below that of Walmart Inc., at 2.1 percent. Walmart recently severed ties with Synchrony Financial over economic terms, and before that, lifted a 2016 ban on Visa credit cards in select Canadian stores resulting from a dispute over fees. Additionally, in June, sources told The Wall Street Journal that settlement of a 2005 merchant-led antitrust suit over card brand interchange fees may soon be resolved.

Jason Gardner, founder and CEO of Marqeta Inc., an Oakland, Calif.-based payment platform provider, pointed out that cost of acceptance is always something that retailers, specifically slim-margin businesses, monitor closely. "While transaction fees for card payments vary and may be higher than other payment methods on the surface (e.g., cash), they also present operational efficiencies that are often missed when only looking at numbers," Gardner said. "For example, card transactions offer a more secure way to pay and drive higher sales at retailers. In addition, cash is notoriously expensive to handle and is subject to fraud."

Kroger and other high-volume, low-margin retailers are expected to continue to exert downward pressure on interchange fees at regular intervals. All tallied, interchange fees cost retailers approximately $90 billion per year, according to the latest estimates.

Striking a balance

While retailers want to rein in costs, consumers want unlimited choice and to reap the benefits of loyalty to certain brands. "You have this four-party system with the network, bank, acquirer and processor; and then you have consumer sentiment," Gardner said. "Consumers want choice when it comes to their payment method. Many consumers like to use credit. They like the points, the miles, and a lot of this is funded through annual fees that consumers pay the bank and interchange."

Gardner believes that this will reach equilibrium soon. "Visa works hard to keep a balanced ecosystem," he said. "Once this is resolved, consumers will be better off and can go back to paying with their Visa cards when and where they want."

Kroger is at an inflection point. They are competing with newer players like Amazon, since its Whole Foods Market Inc. acquisition, and other online food retailers.

"Kroger just announced their own delivery service, so they're looking to go up against Amazon getting into the grocery business," Gardner said. "Consumers are shopping online for their groceries through services like Instacart, which bring even more options."

Whether Kroger's ban on Visa credit cards will remain in effect over an extended period or expand to other stores is unknown, as much hinges upon conversations around its California unit.

Editorial Note:

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