News Alert: Kroger and Visa Part Ways.
What happens if large established nation-wide retailers and brands stop accepting Visa?
Are their sales going to plummet?
Are they going to go out of business?
Are they going to lose billions of dollars?
Nobody really knows.
Visa has been around for a long time, but Kroger is about to find out.
Now before I get into that, I have to explain because if you are like me, Kroger you probably
thought of as like a mid-size company.
Well, Kroger is actually a conglomerate that has purchased you know thousands, they have
2,778 locations nation-wide because they purchased all these different grocery stores.
So they are actually the third largest employer in the U.S.
You have Walmart.
Then you have Amazon and then Kroger.
So Kroger is humongous.
What happened is Kroger decided to stop accepting Visa at their subsidiary in California, a
very large business there in California.
They said, "We're not accepting Visa any longer."
Now this is going to have huge ripple effects across the industry, if as Bloomberg News
has reported, they are going to roll this out nationwide.
That will have huge ripple effects.
Before I get into the ripple effects and how this is going to effect you and your business,
your merchant services business, I want to talk about why Kroger decided to do this.
So I'm going to try my best to give you some numbers.
If you look at the blog article on ccsalespro.com, you can actually see the numbers, but I'll
give them to you from memory and try to get as close as I can.
Last year, 2017, Kroger did about 122.66 billion dollars in revenue, but they only made 1.907
billion in profit.
That's a 1.55% margin.
So you know out of every dollar that Kroger gets in sales, they are making 1.505 cents
out of every dollar.
That's very, very little.
When your margins are that low, interchange fees become a really big problem.
I mean keep in mind the average interchange cost in the U.S. is 1.7%.
It is a lot lower for a grocery store, especially one like Kroger, but it still is a very significant
number.
The reason that Kroger decided to drop Visa is that if you think about it, what is the
only reason that you wouldn't want to drop Visa?
Well, Visa costs money as a business.
So for a business to not accept Visa, the only reason they wouldn't want to do that
is that they are afraid that they are going to lose sales.
Well, if Kroger lost 5% of its total revenue nationwide, which would be a massive drop,
that would be about 6.13 billion dollars that they would actually lose in revenue, but it
would only be about 95 million in profit.
Okay, so they'd lose 95 million in profit there, but if making that change and saying,
"We don't want Visa anymore."
If that caused more people to their own MasterCard that they've duel branded, or to go to like
cash payments or some other option, and let's say it saved them 20 basis points across the
board on all their other remaining revenue, like 117 billion left over that they would
do.
That would actually bring them 245 million in profit from those 20 basis points.
So the thing about Kroger is that they are in a unique position where they can afford
to lose a lot of revenue and still increase their profits because their margins are so
low that if they can cut costs even a little bit, 20 basis points of cost, then it is a
huge win for them and they are going to make a lot more money.
So that is why Kroger specifically is considering a nationwide rollout and why they stopped
accepting cards in their California locations, but how does this all affect you and why does
this story matter.
I'm sure most of you have seen this story, but you might be wondering what's the big
picture.
If we zoom out, why do I care?
I'm a sales rep.
I'm an ISO.
What's the big deal?
Well, there are three primary effects, ripple effects that I believe this would have on
the payments industry.
This is my opinion.
I could be totally wrong.
I've definitely been wrong before, but these are what I think.
This is what I think could happen in the payments industry.
#1.
On my list, Visa's brand invincibility would take a major hit in the market place.
Visa's brand invincibility would take a major hit in the market place.
So Visa has positioned itself as the only indispensable partner in payments.
You know you've got to take Visa.
I mean the Visa brand is so big and so many consumers are so loyal to it and all of these
ideas and things that they've put into our heads and the heads of business owners around
the country.
If a major retailor stopped taking Visa, imagine if Kroger stopped taking Visa and their sales
only dropped 2% and imagine if in doing that they increased their profits by 300 million.
If something like that was to happen in the next 12 month period in 2019 let's say,
that would have enormous ripple effects because that would be data that Walmart is going to
look at.
Imagine if Walmart stopped accepting Visa.
Do you think that would hurt Visa a little bit.
Yea.
The issuing banks, the kind of pressure that would put on them and so it would just really
damage Visa's brand in the mind of business owners across the country in terms of this
fundamental question that is, "Do I need to accept cards?"
That's something our entire industry is really built upon.
If business owners start to think they don't need to accept credit cards anymore, we have
kind of a big problem and so it's just something that could be a ripple effect where it is
going to damage Visa's brand in a pretty significant way possibly.
We'll see what happens.
#2.
Future battles in the legislature and in the Supreme Court would be affected by this outcome.
Now this is an area that might actually play to Visa's favor a little bit if you think
about it.
Most of the court cases now that have to do with the payments industry revolve around,
is Visa, MasterCard and the issuing banks and American Express, are they forming a monopoly
of sorts?
Is it becoming to the point where it's not practical.
You can't really compete with Visa anymore.
They are just too big.
They need to be regulated.
All these things, that's what Visa is fighting in the courts and in the legislatures is this
perception.
Because again, you need to if you really want to zoom out, look around the world.
We are the only developed nation really left that hasn't regulated interchange fees.
Visa is very aware of this.
They are only able to get .3, .4% for their issuing banks in interchange fees over in
the UK, Australia.
They just had to lower, they voluntarily lowered their interchange rates in Canada just about
a month ago in order to avoid another big regulation.
So Visa understands that the U.S. is their goose that lays the golden eggs.
This is where they are making all their profits because it is not regulated.
What they are trying to do is they are trying to avoid this perception that you know they
are a monopoly.
Well, now they can go to the courts and say, "How can you say we are a monopoly?
The third largest business in the country just randomly decided to stop accepting our
cards and look at them.
If somebody doesn't want to take our card, just don't take our card.
If you don't want to pay our fees, don't accept our card.
If you want to accept our card, pay our fees."
So it really helps them to position it more as hey, this is just a good ole free market.
This is what it is.
If you don't want to pay our fees, then don't accept our card.
#3.
This battle could keep Visa's focus off of cash discounting and make it a little harder
to fight it.
So this is a really interesting one because if you think about it, this whole battle,
this whole kind of positioning, it's the kind of thing that if I was out in the field
full time selling cash discounting right now, I would definitely be talking about this Kroger
situation.
I really would.
I'd say, "Look, this is the third largest retailer in the country and they are basically
saying, 'Hey, these interchange fees have gotten too high.'"
This is the time for you to fight back and you know the merchants can even tell their
customers, when their customers come in they are like, "What is this service fee?"
They are like, "Well, Kroger actually just decided to stop accepting Visa all together
because the fees were so high.
We decided that would be much too inconvenient on our clients, so instead what we did is
we have implemented a small price increase, but we are going to offer a discount whenever
you pay with cash.
So that way you have the power of choice to decide if you want to use your Visa, or if
you want to use MasterCard, or if you want to use cash, but we are offering a deal if
you pay with cash.
This could have ripple effects though because you know let's say 2019 comes along and
let's say January 2019, Kroger rolls this out nationwide.
Well, they are going to have to justify this because this is going to inconvenience millions
and millions of consumers every day that have a Visa card.
How are they going to justify it?
What do you think Kroger is going to do?
Are they going to sit back?
Are they just not going to say anything?
No, they are going to have a huge campaign that says, "Visa's fees are too expensive.
That's why we stopped accepting them.
We are sorry that we are inconveniencing you, but we can't afford to pay Visa's rates
anymore.
They are way too high."
So all of a sudden, millions and millions of consumers are going to become more aware
of interchange costs and how high they are.
So is that really the best time for Visa to go on the attack against businesses and say,
"You don't have the right to pass our costs onto consumers."
I don't know.
They could, but that would be pretty challenging for them to go after that.
So it really could kind of keep their focus off of it and make it a little harder to fight
the cash discounting and again it also should help you to kind of frame the cash discounting.
In closing, honestly I was a little surprised just to find out how big Kroger was, how big
of a deal this was, when I really was able to dig into it.
But I think what's going to happen here is it's very possible that the large retailors
could finally get together and have the leverage that they need, the one thing that could really
bring Visa to its knees and bring them to the negotiating table on interchange rates
and that would be not accepting Visa.
So this is just an interesting thing, something I'm really excited to kind of see how it
plays out.
I think it could be good for us.
It could be bad for us, but it is always exciting to watch these big players duke it out.
My name is James Shepherd.
Have an awesome day!
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