What happens if well known, nationwide stores stop accepting Visa?   Will their sales plummet?  No one really knows.  Kroger, the third largest employer in the U.S., has decided to find out.  They are currently running a test in their Mariano’s subsidiary in California.  According to Bloomberg news, they are considering a nationwide rejection of Visa cards at all of their 2,778 locations nationwide.  If they follow through on this threat and profits increase, this action will have ripple effects across the payments industry.

Before discussing the ripple effects, let’s talk about why Kroger took this action in the first place.  While Kroger had revenue of $122.66 billion last year, their net income was only $1.907 billion or 1.55% of revenue.  When your margins are this low, interchange fees become a huge concern.  Kroger could lose sales and still increase profits, if they are able to cut interchange costs.  Suppose that by not accepting Visa at all of their locations, their top line revenue dropped 5% (which would be a big drop.)  That means they would lose $6.1B ($122.66B x 5%) in revenue but only $95 million in profits (1.55% margin.)  If dropping Visa cuts their cost of processing transactions across all revenue by, say, 20 basis points on the remaining $117B in revenue, they would gain $245 million in profit.

So, why does any of this matter to you?  You are building an ISO or in the field selling merchant services.  Why should you care about Kroger?  There are three possible effects which will leave their mark if Kroger stops accepting Visa.

#1 – Visa’s brand of invincibility would take a major hit in the marketplace.  The Visa brand has positioned itself as the only indispensable partner in processing payments.  Kroger employs more people than any other U.S. company other than Walmart and Amazon.  So, if they can drop Visa and increase profits, other low margin businesses may follow suit.  Even this action was taken temporarily.  That puts pressure on Visa and the issuing banks to reduce interchange costs.  This would change the payments landscape.

#2 – Future battles in the legislature and in the supreme court would be affected by this outcome, and they could actually play in Visa’s favor.  The card brands and issuing banks are moving closer and closer to a monopoly type model.  This model produces the atmosphere where their rates seem to be above competitive challenges.  An event such as this would help them make the argument that any business at any time can choose not to accept cards if they feel the fees are too high.  We have, after all, a good ol’ free market.

#3 – This battle could keep Visa’s focus off of cash discounting and make it harder to fight.  If the alternative to cash discounting is that merchants will drop Visa altogether, cash discounting starts to sound pretty good to Visa.  They know that eventually the market pressure will push down the service fee charges, and / or they will fight them in the state legislatures one-by-one.  If Kroger makes a move to stop accepting Visa at all of their locations due to high costs, that may not be the best time for Visa to come out swinging against the right of business owners to pass those costs on to consumers.

Honestly, I was a little surprised to see how large Kroger really is.  Imagine if Walmart said they were not accepting Visa anymore.  That is pretty close to what is about to happen and is not outside the realm of possibility here.  I have felt for years that interchange costs in the U.S. were not sustainable when compared with other developed countries.  All this time, I thought cash discounting / surcharging would eventually bubble up to the large retailers, but it turns out they may have other plans.  If Walmart, Amazon, Target and other mega retailers see a crack in the armor, they may join forces and threaten the one thing that could bring Visa to its knees – not accepting it.

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