The Cost of Accepting Credit Cards is too High

Amazon told customers of the changes this week. After making purchases they received a notification from the retailer saying that from Jan. 19, 2022 “we will no longer accept Visa credit cards issued in the U.K.” due to the high fees charged to process transactions. Visa shares slumped 5.2% to. in New York. They’ve dropped 6.6% this year, compared with a 29% increase for the S&P 500 Information Technology Index.

An Amazon spokesperson said “the cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers.” Customers can still use Visa debit cards, Mastercard and Amex credit cards, and Eurocard, as well as Visa cards issued outside of the UK.

Since Brexit, an EU regulation capping fees charged by card issuers is no longer in place in the UK. As a result, card schemes have increased their fees by £150 million a year, to the expense of both UK and European retailers. Some fees have more than quintupled, according to research by retail payments advisory firm CMS Payments Intelligence and the British Retail Consortium. In the Guardian, Mike Cherry the national chairman of the Federation of Small Businesses said: “Small businesses are almost always charged more for card terminals than big corporates – so when online giants start throwing down the gauntlet, you know the situation is becoming critical.”

An Opaque Pricing Model

“We are very disappointed that Amazon is threatening to restrict consumer choice in the future,” a Visa spokesperson said in a statement.  The BBC cites Mastercard’s executive vice chairman Ann Cairns: “It’s very important that customers have choice, and have the widest variety of ability to pay, whether that’s through cards or from their bank accounts or cashMoney in physical form such as banknotes and coins. More, and remember that it is never the consumer that pays fees.”

It is Always the Consumer who Pays

This is of course not true. It is always the customer who pays, as merchants pass on the costs of payments by adding them to the price of their products and services.  However, card schemes have developed an opaque pricing model which makes it very difficult for  consumers,  merchants and regulators to understand the real costs of payments. In addition, most of the research focusing on the cost of payments looks at the real, visible and tangible costs and omit a number of indirect costs including fraud, data breaches, regulatory compliance, outages and systems failures or failed transactions.

Moreover, customers are actually incentivized to choose the more expensive cards as they are rewarded with additional services and bonus points. In other terms, customers who pay with efficient paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More instruments – including cash – are in fact subsidizing the rewards earned on expensive credit cards.

In Singapore and Australia, Amazon imposes a surcharge for the use Visa credit cards. In many countries, however surcharging is prohibited and card schemes have been actively lobbying against it.

Cash is a Payment Option at Amazon

In some countries, Amazon empowers its customers to pay with cash. Amazon PayCode, allows customers to select Amazon PayCode at checkout and then pay for their purchase in cash at one of 15,000 Western Union locations. Separately, Amazon Cash enables customers to load cash into their Amazon Balance for making online Amazon purchases. In April 2019, Amazon announced that Amazon Go Stores in the US would accept cash alongside its cashier-less technology. These options are not available in the UK.

In a 2019 study, Carbo-Valverde and Rodriguez-Fernandez analyse the cost of cashAlthough banknotes are delivered to the citizens free of charge and their use does not involve a specific fee, costs are generated during their manufacturing, storage and circulation process, which are covered by different social agents (central banks, commercial banks, retailers etc). More compared to debit cards across 52 countries. They identified and estimated the resource and private costs to determine the total social cost for both payment instruments, for consumers and retailers. The results show that the unit cost of debit cards is 2.8 times larger than the cost of cash globally.

The cost of a cash transaction remains a benchmark and is used to measure the efficiency of other payment methods. This is shown in the Merchant Indifference Test (MIT), which is used by regulators to establish the level of Multilateral Interchange Fees applied by card schemes. This test ensures that merchants do not pay higher charges than the value of the transactional benefits from using cards by comparing them to the cost of cash.

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