Merchant Card Bans: To What End?

01st September 2018
Contributor:
Callum Godwin
Callum Godwin
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The payments industry is a hot bed of exciting news, but the surprise story of the quarter has come from Kroger, who announced a ban on all Visa credit cards in its Foods Co. supermarkets unit, starting August 14th, 2018. The Wall Street Journal reports that the ban will affect 21 Foods Co. supermarkets and five gas stations in California, citing Visa’s high card fees as the reason for the ban.

History

Merchant card bans have a relatively short history, and the number of merchants who have publicly attempted to ban a specific card type from their stores is limited. The most notable card ban came from Walmart in 2016, who banned Visa credit cards at 19 store locations in Canada due to high credit card interchange fees. Although the ban did not last, as Walmart and Visa reached a deal six months later, it did establish a precedent for other merchants to ban certain credit cards from their stores.

Another notable example, while not a card ban, comes from the Australian supermarket chain, Woolworths, who disabled its debit routing capabilities to international card networks in 2010. Instead, Woolworths opted to route all debit transactions via the domestic network, EFTPOS, citing minimizing costs as the reason for the change. The disablement was implemented in April 2010 and lasted until 2012, when Woolworths re-enabled routing to international card networks. While the reasons for the re-enablement were not made public, the card networks will be keen to avoid these situations in the future.

Why ban credit cards in particular?

Merchants are willing to ban specific credit cards from their stores primarily for one reason: high fees. Both Walmart and Kroger cited the high costs associated with accepting Visa credit cards as the reason for the bans.

Merchants have a preference for accepting debit cards, as debit card transactions typically have lower interchange fees. In the U.S., the Durbin amendment was introduced to regulate interchange fees, but excluded credit cards from its provisions. In Canada, credit card interchange fees have never been regulated because the Canadian government chose to negotiate for voluntary reductions instead. The previous reduction, negotiated in 2015, lowered the average credit card interchange rate to 1.5%, which still left Canada with one of the highest credit card interchange rates globally. In August 2018, the Canadian government announced the latest reductions, which will see the average interchange rate reduced to 1.4% in 2020.

While credit cards are unregulated in the U.S. and have higher interchange fees than debit cards, there are also additional limitations for merchants who accept credit cards. One of these limitations is the honor all cards rule, which states if a merchant accepts one type of a card network’s credit card, they must accept all credit cards a card network offers. The honor all cards rule is non-negotiable and is enforced via fine, which can start at up to $5,000 a day. If the honor all cards rule was not in place, merchants could refuse to accept high interchange premium rewards cards only, which would put downward pressure on their interchange fees. Additionally, if merchants were not forced to follow the honor all issuers rule they could negotiate interchange with issuers directly.

Enforcing a card ban has the potential for great rewards, but at the same time a high degree of risk for merchants, including a potential loss of sales. Walmart took this risk and had the opportunity to negotiate a deal with Visa, which likely reduced Walmart’s interchange fees in Canada. Kroger is likely looking for a similar deal and will be hoping to negotiate lower interchange fees in the U.S. Additionally, the bans benefit the wider merchant community by bringing the issue of high fees to the public forefront.

Callum Godwin | Chief Economist

While these one-off bans have proven in the past to be beneficial to individual merchants, they are unlikely to affect credit card interchange fees for all merchants. To have a long-term effect on credit card interchange fees across the board, regulation – rather than a merchant-wide ban on certain card types – will be necessary. Through regulation, merchants can attain lower credit card interchange rates without limiting consumer payment choice.

In Summary…

Over a short period, two major merchants have struck blows against Visa by banning the acceptance of its credit cards at some store locations. The Visa credit card ban imposed by Kroger at some stores has once again brought the issue of high credit card interchange fees to the public’s attention and shined a light on the burden high interchange fees place on merchants. It is commendable merchants are taking a stand against high interchanges fees, but there’s a long way to go before any potential benefits will flow down to smaller merchants and before card networks will be prepared to prevent downward pressure on their interchange fees. To realize a positive change in credit card interchange fees for all, regulation will be necessary.

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