This week, Amazon announced as of January 2022 it would no longer accept Visa credit cards issued in the U.K. because it says Visa’s fees are too high.
There are specific reasons why this schism has occurred in the U.K., which is tied up with Brexit. But this is not really about Britain – and it’s not even about Amazon. More likely, this presages more pressure on the giant payment processors deriving from the growing power and presence of fintech.
First, the U.K. situation.
When Britain was part of the European Union, it complied with E.U. rules that put a cap on how much payment processors can charge. Now that the U.K. has left the club, companies like Visa could start to charge whatever they liked.
Visa executives presumably thought this was an opportunity to flex their muscles. Afterall, Visa and Mastercard are not just obscure parts of the financial plumbing. They are massive global brands that use their visibility to ensure consumers and merchants accept their cards – which makes banks ready to issue or acquire on their behalf.
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It turns out, in Britain at least, Amazon has enough scale to push back. Its decision to fire Visa is a humiliation for the payments company. Mastercard (which is still on the U.K. platform) and the others will be wary of poking Jeff Bezos again.
It would be a mistake, however, to think this is just about Amazon’s size. The lesson is relevant to e-commerce sites around the world, including Asia, where many such indigenous platforms continue to proliferate.
Yes, the rise of a digital economy is good for Visa and Mastercard because they are happy to process any payment that isn’t cash. But the digital economy is also enabling plenty of choice in payments tech.
In a world without fintech, even Amazon would have to bow to the oligopoly in payments. But Amazon judged its consumers and sellers had ample payment tools already, presumably more than one.
Change so things stay the same
The dust-up puts a different light on how payment giants are looking for growth.
Both have made the shift away from branding themselves as just credit-card companies. They are “networks of networks”, to use the Visa jargon; “the theme is choice” to use Mastercard’s.
DigFin reported on Mastercard moving into niches that were originally positioned as disruptors to the classic four-pillar payments model that Visa and Mastercard use: buy-now, pay-later, and crypto. These aren’t just different payment options. They are based on different infrastructure.
BNPL fintechs such as AfterPay and Klarna use a three-sided model, with a single platform catering to consumers and sellers, rather than the classic consumer/bank/acquirer/merchant arrangement. Crypto is peer-to-peer.
Mastercard is finding ways to enter BNPL without shedding its traditional model. Its entry product, Pay & Split, is actually aimed at small- and medium-sized enterprises, to let them pay their own suppliers via installments.
Visa is also chasing the SME segment, by partnering with fintechs that can funnel SME business – in our story, with Neat, as well as with the likes of Airwallex and Currencie. These SME efforts leave the four-pillar model intact.
Visa has also designed solutions to serve as rails for central-bank digital currencies that won a contest sponsored by the Monetary Authority of Singapore. This too highlights the status quo infrastructure.
Credit cards remain their bread and butter, however. SMEs and facilitating CBDCs are unlikely to generate the same profitability.
The Amazon imbroglio is therefore a sign that the bread is getting moldy, and the butter has been in the sun too long. The details of Brexit and Bezos should not obscure a deeper trend: fintech is biting into the margins of the classic four-pillar payments model.
Visa and Mastercard can acquire and coopt rivals, but the fintech industry is too diffuse for this to change the direction of travel. And we are just getting started with the unbundling of payments that blockchain-based, “Web3” finance promises.
Visa and Mastercard will remain relevant leaders in global payments if they are able to adjust to declining margins. Because fintech has eroded those, probably for good.