Visa vs Wal-Mart
Published July 2016
by Manole Capital Mgmt
Visa versus Wal-Mart:
On Monday July 19 th, Wal-Mart did something millions of merchants around the world could have only imagined. For years, merchants have wondered what would happen to their sales if they did not accept credit cards at the point-of-sale. Now, effective immediately, at three Canadian Wal-Mart stores in Thunder Bay, Visa cards cannot be used. Thunder Bay is a remote town of 120,000 people at the northwest corner of Lake Superior.
Based upon the results of this test, Wal-Mart may look to phase in the Visa ban at its 405 stores across Canada. It remains to be seen if Wal-Mart will be so brazen as to also take this across its US locations, which account for 62% of its total sales. Wal-Mart did not ban any other credit cards (MasterCard, American Express or Discover), but seemingly wants to take on Visa specifically.
Across the globe, Visa and MasterCard can be used in 40 million locations. The brands are ubiquitous for payments. They allow a merchant to transact with an unknown customer, and provide customers an instantaneous line of credit to transact for a higher level of value than cash they may currently have. Whether it is at a physical location or online, the payment networks act as a trusted intermediary to seamlessly allow commerce to occur. For this service, there is a modest cost. For every $100 transacted, there is a roughly $2.50 charge - called the Merchant Discount Rate or MDR. Not all merchants see the benefit.
The parties involved:
In any payment transaction, there are multiple parties involved. The movement of money and information is quite complicated, although it happens in seconds at the point-of-sale. Banks, as the card issuer, provide credit to individuals. They earn the vast majority of MDR (roughly 70%) and rightly so, as they are taking the most risk in every transaction. If the consumer does not pay his/her charges, it is the bank that is dealing with the delinquency. Banks lend money on behalf of cardholders and make timely payments to merchants for items purchased. Every month, cardholders receive a statement and can elect to pay the full amount charged or a partial amount. In the event a cardholder pays less than the amount owed, banks can earn interest.
In terms of market share, thousands of banks vie for a successful spot in our wallets. Card issuers like Capital One (NYSE:COF), Discover (NYSE:DFS), American Express (NYSE:AXP), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup. The more usage the card gets, the more profits the bank earns. This is the thesis behind their loyalty and rewards programs. When economic times are good, banks have little concern for creditworthiness. When the economy turns, it is the bank that is left with billions of bad loans and charge-offs.
Merchant acquirers and processors work for retailers. Processors do much of the heavy lifting in this transaction. They authorized, switch, clear and then settle transactions between the card issuer and the merchant. The provide value added services and critical risk management services. For all of these activities, processors are paid roughly ~ 20% of the MDR. Merchants, especially small businesses, are reliant on cash flow and liquidity. Without the critical work of merchant processors, these small businesses would not be able to handle their daily cash flow requirements.
Payment networks sit in the middle of this complicated transaction and give value to that plastic card in your wallet. These brands allow a purchase transaction to occur, providing assurance to a seller that payment is forthcoming - from any buyer. They provide real-time fraud monitoring and encryption. The networks also provide important data and reports to card issuers and act as a toll-keeper in the middle of a complicated transaction between a merchant's point-of-sale device and a bank. For this service, the payment networks earn the least amount of money per transaction, at roughly 10% of the MDR. Yet, the need for a trusted intermediary, in most transactions, is critical. As the payment landscape continues to evolve, the payment networks will continue to provide the critical trust, security and global acceptance necessary.
It's no surprise that all consumers like choice. Whether a cardholder wants to use cash, check, debit cards or a credit card, it is their choice on how to make payment. Merchants that push their consumers towards one payment form are rarely successful in this activity. So why do they do it? Cost. The fees for accepting a paper check differ from cash, which also differs from debit and credit cards.
Some merchants believe that cash is their cheapest form of payment. That is until their cash transactions disappear from the register. That is until they pay to have an armored guard take the daily proceeds to the bank. That is until they have security issues or a burglary.
We believe that this is a grand Wal-Mart experiment. Management probably wanted to see the economic ramifications of bypassing Visa. A Wal-Mart spokesperson would not comment on whether or not this ban would proceed nationwide. If we look at the fees that Wal-Mart pays as a long-term battle with the networks, this is a small skirmish in a bigger war. It is one thing to make statements and another to pursue litigation against Visa as a monopoly (which it isn't). Wal-Mart needs to fully understand the value that Visa and other payment mechanisms provide.
The end result is likely to be a resolution between Wal-Mart and Visa without providing the details to the public. Wal-Mart, as one of the world's largest merchants, will get the scale benefits it deserves. It will be able to accept credit cards at a lower fee than any other global retailer. According to Visa, Wal-Mart already receives the lowest rate of any merchant in Canada. Wal-Mart believes it should be much lower and it is using its size and scale to give them an advantage. In a world of thin margins, Wal-Mart believes it needs to use this advantage over smaller businesses, even on payment acceptance fees.
Canada is a modern and developed market. There are 54 million Canadian Visa cardholders, covering pre-paid, debit and credit cards. Canadians will continue to be able to use their cards at over 5,200 stores in the Thunder Bay area, as well as anywhere else Visa is welcomed.
Historically, there is no evidence that any reduction in MDR has been passed through to end consumers in lower costs or savings. We believe this Wal-Mart experiment will not amount to much. This is nothing more than a commercial dispute between two heavyweights. In terms of an impact on the individual stocks, this disagreement is not financially material and is really just "noise".
According to a Wal-Mart spokesperson, it is "taking a stand for our customers because Visa's high fees can result in increased prices". In a month, Wal-Mart will claim victory when this is resolved. In the meantime, Wal-Mart will garner valuable data and information about how critical card based payments are to their sales and traffic.
We believe that there will be unintended consequences of forcing shoppers to pay with a specific payment tender. On the 1 st day of the ban, the WSJ quoted Thunder Bay resident Rebecca Zajac, who said "Wal-Mart just lost a couple of thousands of dollars a month from one family". Only time will tell whether or not this decision damages Wal-Mart's Canadian brand.
Disclosure: I am/we are long V.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The primary tickers should be Visa (V) and Wal-Mart (WMT).