Two Tribes Go to War

I read with great interest the story on Fox Business this week about the falling out between Kroger and Visa. It’s a classic example of two parties each believing that they have the upper hand in a dispute, and refusing to budge because they expect their opponent to blink first. But as American author David Drake points out, wars generally start when both sides believe they can win, and more than half of the time they're wrong. In this case, Kroger believes that VISA needs them more than they need the credit card company, while Visa believes the same thing about the supermarket. There’s a chance that both of them are wrong, and an even bigger chance that the dispute will cost both of them more than it ought to…

At the heart of this dispute is the fact that all credit card companies charge merchants a set amount for processing sales made using their cards – that’s how the credit card companies make their money, along with the interest they hope to collect from consumers who happen to be bad at math. For years, American Express had the highest fee structure, which is what led to a number of businesses refusing to take American Express cards. Master Card and Visa have traditionally had some of the lowest transaction fees, but apparently Kroger believes that it should be given a better rate than Visa wants to give them, based on the number of transactions Kroger sends in each day…

Visa, in turn, apparently believes that Kroger should be satisfied with paying the same rate that all of its competitors get. Every business wants to gain some competitive advantage over the other companies in their industry, but Visa does not see any reason why they should make less money per transaction in order to give Kroger a better bottom line. As a result, Kroger is threatening to stop taking credit cards with the Visa logo, and Visa is telling them to go ahead and refuse to accept payment and see what effect that has on their business…

Now, we should probably acknowledge that no business has any obligation to accept any particular form of payment. There are still a number of cash-only businesses operating in every community, and others who won’t take checks, vouchers, or Bitcoins. Kroger is only accepting the various credit cards as a convenience to its customers, and if it has enough loyal customers – or, at least, enough customers with more than one method of payment who still want to shop at Kroger if they can’t use their Visa cards – then this dispute shouldn’t affect them. Likewise, Visa has thousands (or millions) of other merchants who are still accepting their cards and paying their fees. What I think both companies are ignoring in this case is the competition…

The grocery industry normally operates on insanely low margins; food products can have as low as 0.8% margin, which makes it understandable that Kroger would want to save money on their merchant’s fees. Unfortunately, that also means that even a very small number of lost customers will impact their business. Visa doesn’t have the same problem – margin isn’t usually an issue for financial services firms. But Visa makes most of its money from the interest it charges cardholders, which means that the only thing that would be worse for them than not receiving merchant fees for transactions would be if people stop using their Visa cards for transactions on which they will end up paying interest…

It should be interesting to see which company blinks first. From where I’m sitting, each of them needs the other badly enough that they should really stop butting heads and work something out, but once again, I’m not the CEO of a major grocery or financial services company, and I don’t have access to their books anyway. Let’s just hope they figure this out before one or the other company fails and throws thousands of people who want no part of this feud out of work…