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Kroger takes on Visa
In a battle over “swipe” fees, Kroger will stop accepting Visa credit cards at 21 of its Foods Co. supermarkets and five gas stations in California starting August 14. The largest U.S. supermarket chain further threatened to expand the ban if negotiations with Visa aren’t successful.
“If we have to expand that beyond Foods Co., we’re prepared to take that step,” Chris Hjelm EVP and CIO at Kroger, told Bloomberg. “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.”
Kroger pays about $90 billion in credit card processing fees each year and the grocer claims Visa’s excessive fees are driving prices higher for consumers.
“We realize this will be a change for some customers,” said Foods Co. President Bryan Kaltenbach in a statement. “But we believe this change will benefit all our customers by allowing our Foods Co. stores to continue to offer the things our customers value most, including our low prices, fresh produce and services.”
Foods Co. will still accept all debit cards including Visa debit cards as well as MasterCard, American Express and Discover credit cards.
Visa expressed disappointment over the Food Co. ban. The largest card network in the U.S. said in a statement, “When consumer choice is limited, nobody wins. Our goal is to protect the interests of our cardholders to ensure they can use their Visa credit cards wherever they shop. Visa remains committed to working with Kroger to reach a reasonable solution.”
Retailers have long battled interchange fees by lobbying lawmakers for lower rates, filing lawsuits in conjunction with other retailers and on their own, and seeking out technology upgrades to outright avoid traditional card payments entirely. Such fees are rising as consumers are using cards more and the arrival of more high-cost cards with generous rewards programs, according to The Wall Street Journal.
In 2016, Walmart similarly banned Visa credit cards for about six months at 19 stores in Canada due to “unacceptably high” fees.
- Kroger May Not Let You Pay With Visa Cards Anymore. Here’s Why – Fortune
- Credit-Card Backlash Mounts as Kroger Weighs Expanding Visa Ban – Bloomberg
- Kroger may expand Visa credit-card ban to more stores – USA Today
- Visa, Mastercard Near Settlement Over Card-Swipe Fees – The Wall Street Journal
- Synchrony Lost Walmart Card Deal in Battle With Capital One – Bloomberg
- Walmart Canada to End Visa Ban – Rate Hub
Discussion Questions
DISCUSSION QUESTIONS: Is Kroger’s standoff with Visa likely worth the inconvenience to consumers? What leverage do retailers have on the card networks?
Poll
BrainTrust
Neil Saunders
Managing Director, GlobalData
Dan Frechtling
CEO, Boltive
Without knowing what Visa is requesting it’s hard to take sides but it would seem that two wrongs don’t make a right. No Kroger should not be held hostage by Visa, but if Visa’s demands are fair, then Kroger should comply. Eliminating Visa from Kroger will upset many customers and it may cost the company sales. Plus, most customers will blame Kroger before they blame Visa. Perhaps the best compromise is to have customers pay an additional few pennies per charge to cover the cost of using their Visa should they wish to use that card. Giving power and control to the consumer will allow Visa to see if their fees are excessive without penalizing those customers who still want to use their Visa card. Many customers will complain but if customers see that only when using their Visa card they need to pay an additional fee, it may give them a better understanding of what is going on and hopefully both Visa and Kroger will arrive at a reasonable compromise to remove those additional fees.
Given the small number of stores involved, this is something of a warning shot. However, it shows how frustrated Kroger is with Visa’s fees. The problem for Kroger is that the ban reduces consumer choice and will frustrate some of its customers, even though it’s at stores that have clearly been chosen because of lower credit card use. It will be hard for Kroger to expand this to other stores and banners, especially those where card use is higher.
That said, I have sympathy with Kroger and believe that the payment companies are setting themselves up for a fall. The payments world is changing rapidly and high swipe fees will only encourage and hasten that change.
Let Kroger enable Apple Pay. The tender is gaining in popularity and it’s faster than anything out there. Then Kroger doesn’t have to worry about whose cards it will and won’t accept.
Change is constant in retail and commerce, so we should expect other grocers and retailers in the battle to maintain margins to follow Kroger’s lead in helping to mitigate the credit card transactions fees that often get absorbed by the cost of the products.
However, Kroger’s response to Visa does create some constraints on choice, as it’s one of the more ubiquitous credit card options. There are ways to mitigate this by leveraging Apple Pay, Google Pay, PayPal and other options, which helps to reduce the transaction fees associated with credit card usage.
In this balancing act, Kroger should provide another viable option for the Visa cardholders, otherwise they may end up alienating a subset of their customer base.
The question is, what will Kroger offer its customers in exchange for not accepting the VISA card? If they’re not offering something I think they will have a lot of unhappy campers.
When Costco gave up the American Express card I was not a happy camper. When I found out all of the extra benefits it gave me, such as 4 percent off on gas no matter where I bought it, they made me a believer.
In a world where it always comes down to the consumer paying as provider and supplier fees are passed along, you stand bold and sock-it-to-’em Kroger! With whip and chair you can back that beast into its corner, and consumers will appreciate this as representative of many actions you are taking to bring value.
Kroger has no doubt weighed the inconvenience to consumers and potential loss in business against the $90 billion it is shelling out in processing fees and determined that this stand-off is the most expense-efficient option. With the rise of digital wallets enabling even more payment options at checkout, I don’t think it will dramatically impact sales. The ball is in Visa’s court!
I know the figure of $90 billion in swipe fees came from the Bloomberg article, but is that number possible for a company with about $125 billion in annual sales?
I questioned the same thing when I read it, Dick.
I agree with Neil that this looks like the first warning shot in a negotiation for lower fees. Otherwise, if Kroger sticks to its guns, it’s a loss for both companies. I shop at one of the Kroger brands acquired from Roundy’s and I only carry Visa cards (including the one linked to Apple Pay). It’s simple: If Kroger drops Visa, I drop Kroger and I’ll have plenty of company.
I applaud Kroger for taking a stand against Visa. Visa and other credit cards have the power to increase transaction fees at will and retailers are at their mercy. While I think this is a risky move for Kroger, if more retailers followed their lead, as a group, they may be able to influence Visa to lower their rates.
From a customer perspective it is a pain, as many customers primarily carry Visa credit cards and it may discourage some people from shopping at Kroger. That said, some discount grocery chains currently don’t accept any credit cards and only accept debit cards or cash. Initially I thought that was awkward, but I still shop at these stores that are worth it. Loyal Kroger customers will remain loyal and I hope some other retailers join Kroger in this endeavor.
I feel bad for the employees in these situations as they have to be the bearers of bad news to the customer and deal with the immediate blowback. If the fees are as unreasonable as Kroger claims, then they are undoubtedly being passed on to the consumer, so it certainly is in the customer’s best interest to side with Kroger on this issue. The trick is being able to tell that story concisely and convincingly at the register, so customers see that the long-term benefits will outweigh their short-term inconvenience.
Hopefully Kroger is paying close attention to what type of customer-facing messaging is well-received so they can refine that script and implement it if they need to expand the ban beyond the initial 21 stores.
Kroger’s move shows how much clout they have in the marketplace. Kroger has apparently been pushed to a point where they believe they need to push back onto Visa and their charges. I can only imagine that Visa would continue to push rates increases until someone — shoppers or in this case the retailers — say enough. It would be interesting to see the numbers of the grocery shoppers who carry unrealistic credit card debt. I suspect there is more than one factor driving this issue. I wouldn’t be surprised to see Kroger issue their own credit card and finance their customers directly.
My gut reaction is to say no — it’s not worth the inconvenience. But Costco only accepts one brand of major credit cards and that hasn’t seemed to damage their sales. So the question really comes down to whether or not customers are loyal enough to Kroger brands to withstand the inconvenience.
We often talk about win-win situations and even win-win-wins. This is a lose-lose-lose situation. Visa loses a little bit of business (at this point). Kroger likely will lose some business at these location from loyal Visa credit card customers. Those customers lose the most because they had no say in the decision that forced them to potentially change the supermarket at which they shop.
Is Kroger justified in dropping Visa at these stores? As Art pointed out, it is hard for us to know without the details of the dispute. With a $90 billion expense for credit card fees it would seem the battle is worth fighting.
Kroger has their PLCC (private label credit card) which customers can get with rewards, however, customers typically do not want more cards. The solution of using a digital wallet makes the most sense. The marketing of the issue to the customers can build a strong case for Kroger if done right (Kroger’s stance must be in favor of not raising prices to accommodate higher fees so they gain customer support). Otherwise, taking away a payment option is never a good idea. With that said, Millennials and Gen Z are less likely to even have credit cards (63 percent do not have a credit card and prefer to use debit cards), so this move may be ahead of the times.
This has been a long time coming. The credit card companies require outlandish fees for completely electronic processing. This amounts to 1 percent or 1.5 percent of the gross charge. The amount this represents of Kroger’s profit is outrageous (2x to 3x this amount) and any large bank would gladly establish this electronic processing if they had the gumption, presence and were smart enough to offer this as a part of their services. ith Apple Pay, Samsung Pay and other phone-based services becoming stronger, we may well see a shift in the back end of who handles these electronic transactions and their impact on the bottom line for a retailer.
There could be a lot of factors at play here given the complexity of the payments industry in general. Clearly, Kroger is choosing to fire a shot across the bow at Visa to raise the issue of swipe fees to a new level. This feels more like a warning given the number of stores involved, but Kroger may just be showing its resolve to go deeper in their battle with Visa. I agree with others here that this is a great marketing opportunity for Kroger to push mobile wallets (Apple Pay, Android Pay, etc.) and other more disruptive payment systems which may, in fact, be more heavily felt by Visa.
The payments industry has had a bit of a choke hold on retailers for some time so while I applaud Kroger for taking a stand, it’s hard to see how their customers will perceive this as anything other than Kroger creating an inconvenience for them. Most of their customers won’t know the backstory to this dispute so they’ll just see that Kroger isn’t accepting their preferred credit card. It will come down to which brand they show more loyalty to. I believe retailers need to institute more transparency about payment processing with their customers if they want to really bring the fight to the card companies. This would allow them to show customers how fees vary for different payment systems and that might influence their choices. It’s a fine line to walk so as not to alienate customers but, as the fees keep rising, retailers will need to do something if they don’t want it to eat into their margins.
Kroger is saying enough is enough. I seriously question the annual figure of $90 billion in processing fees. That is an unbelievable amount in my opinion. Kroger is drawing a line in the sand telling Visa; make a move if you value our business. My guess is Visa is going to respond and this will be resolved before the week is over. But then keep on the lookout for another big chain to stand up and make the same move against Visa.
Costco did this a few years ago by throwing American Express out of their stores, and struck a better deal with Visa. Their business disruption was not a factor at all, as it was a smooth transition.
Major mega retailers are pounding everyone for lower costs, and deals to add profits to the bottom line, and will continue to use their power to stay on top. In the end, Visa will cave to some degree and lower their fees, and guess who will pay more? That’s right, the smaller retailers will pick up the slack, and that is how retail works today.
Escalating the dispute is a calculated move by Kroger and Visa. It will cause short term pain to Foods Co. shoppers, and maybe negative media for the two companies, but both are betting that escalating is smarter than caving.
When Visa and Walmart Canada got into a similar disagreement, Visa took the gloves off. It bought billboards showcasing how many other local retailers accepted the card when the affected Walmart stores were isolated in Thunder Bay, Ontario. When the feud expanded to Manitoba, it gave a $10 credit to shoppers buying at Walmart competitors. It also wrote open letters published in the Canada National Post and elsewhere stating its position. In the end, other stakeholders created pressure — consumers pushed Walmart to come to terms, and issuing banks pushed Visa to compromise.
Foods Co. stores are distributed geographically in northern and central California, so local marketing will be less effective. Once a compromise is negotiated, Visa will regain acceptance and Kroger will gain a small margin savings in perpetuity. Both will declare victory because they will be in a better position than today’s standoff.
When the announcement was made Monday, Kroger shares were up and Visa’s were down, but today both are close to where they were when the kerfuffle started.
“$90 billion in credit card processing fees each year” I’m pretty sure that should read $90 Million (Kroger only has $115B in revenue, so if it IS true, I can see why it’s a problem!).
Personally I’m surprised, since (1) Visa is one of the (if not in fact THE) major cards, and (2) I wasn’t aware of their fees being unusual. Apparently though, Kroger feels differently.
Many customers either use debit cards or cash (imagine!) or have multiple cards and will use something else: advantage Kroger. OTOH, a significant number may become annoyed and switch grocers. Only time will tell how this turns out, but suffice it to say only a large retailer like this has sufficient leverage for this protest to attract attention.