Is Walmart playing chicken with Visa in rejecting cards?

TORONTO — There is speculation in retail and financial circles that Walmart’s decision to stop accepting Visa at the retailer’s Canadian stores is merely a bargaining tactic aimed at securing a better fee arrangement from the credit card giant.

But if the plan to bar one of the country’s largest credit cards from Walmart sticks, it would be unpleasant news for Canada’s banks that share in the fees levied on each credit card transaction.

“I think it would have some [impact],” Jason Mercer, an assistant vice-president and analyst at Moody’s Investors Service, said after the surprise weekend announcement that Walmart would begin phasing out acceptance of Visa cards across the country next month.

Another industry source calculated that there could be some $82 million in interchange fees at stake for the Canadian banks that issue Visa cards. It’s not material, but it’s not insubstantial either, and it could cause the banks to put pressure on Visa to head back to the negotiating table and cut a deal to lower fees charged to the retailing giant, this person said.

Interchange fees paid by merchants on each credit card transaction — and shared by the banks that issue the cards, credit card processors, and the credit card networks like Visa and MasterCard — have come under increasing scrutiny in recent years by retail groups and politicians who fear they ultimately drive up the cost of goods for consumers.

In late 2014, after a series of negotiations, the fees charged to retailers in Canada were voluntarily reduced in a move that kept the government from entering the fray and regulating the interchange rates set by credit card networks.

But retail and consumer groups have continued to complain that the rates in Canada outstrip those in jurisdictions including Australia and parts of Europe.

On the weekend, Walmart shocked even seasoned industry analysts by announcing that the retailer would no longer accept Visa in Canadian stores, with a countrywide rollout beginning July 18 in Thunder Bay, Ont.

In a statement, Walmart said the fees applied to Visa credit card transactions in Canada were “unacceptably high,” and the retailer was unable to negotiate an acceptable fee it needed to keep its own costs in check.

Walmart Canada pays more than $100 million in fees each year to accept credit cards including Visa, MasterCard, American Express, and Discover, according to the statement.

The weekend announcement from Walmart prompted Visa to issue a statement, which defended the fee it offered as “one of the lowest rates available to any merchant in the country.” The credit card network said Walmart’s decision would have a “negative impact … on loyal shoppers” across the country.

Visa is not the first credit card company to feel the effects of a retailer taking a hard line on costs.

Last year, American Express learned its cards would be cast out of wholesale retailer Costco. The relationship between Costco and Amex was first severed in Canada in late 2014 when the credit card company and the retailer could come to terms when it came time to renegotiate their 15-year-old arrangement.

A Canadian retail analyst, who spoke on condition of anonymity, says more tussles are likely to emerge as retailers grapple with thin margins that are being further pressed by fierce competition including online shopping alternatives.

The analyst pointed to troubled companies such as clothing retailer Aeropostale, which announced in May it would be closing all its Canadian outlets as it sought bankruptcy protection in the United States, as evidence of the serious challenges facing the industry right now.

Mercer, the Moody’s analyst, said although banks would be affected by a long-term suspension of the use of Visa cards in Walmart — which intends to continue accepting debit and the other credit cards previously accepted — the spending patterns of Walmart customers could soften the blow.

A portion of Walmart customers tend to carry balances, and make less frequent purchases that generate the interchange fees shared by credit card companies and banks, he explained.

“I would suggest that these customers are more likely to use their card as a financing rather than a payment vehicle… As I understand it, people who carry a balance use their card less for transactions,” Mercer said.

The “prime” customer for a bank credit card is known as a “transactor,” he said, describing this segment as cardholders who pay their bill in full every month and then go on to make more purchases the following month.

“This is where the majority of interchange revenue is generated,” said Mercer.

Four of Canada’s five largest banks issue Visa cards, while Bank of Montreal issues only MasterCard.

Royal Bank of Canada and Toronto-Dominion Bank also issue MasterCard credit cards, while Canadian Imperial Bank of Commerce has a relationship with MasterCard through its association with President’s Choice Financial. Bank of Nova Scotia, which issues Visa and American Express cards, acquired the Sears Financial MasterCard portfolio from JP Morgan Chase Bank last year.

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