Visa Ends Ban on Retailer Discounts for Specific Cards
Retiring Visa CEO Joseph Saunders and his successor, JPMorgan's Charlie Scharf, spoke with American Banker about the challenges facing the card network, the changing payments industry, mounting regulations and the importance of an orderly leadership transition.October 25
Visa (NYSE:V) is giving its merchants more flexibility in offering discounts to their customers.
Until recently, the card network generally prohibited its retail partners from offering special deals to customers that paid with a specific bank's credit or debit card. But Visa quietly lifted the ban on Feb. 1, paving the way for retailers to cut deals with card issuers, according to Visa group president of the Americas William Sheedy.
"There has not been the flexibility in the past for a merchant to say to a particular issuer's customers, 'Use your card here and we will give you 5% off,'" for example, Sheedy said in a recent interview.
The rule change, implemented by new Chief Executive Charles Scharf, applies to all Visa products, including credit, debit and prepaid cards.
Though the change is small, it signals a potentially significant shift at Visa, where Scharf took over in November. He has frequently called increased flexibility a key priority at the network, which has long faced merchant complaints, litigation and even government actions about the prices and rules it imposes on retailers that accept its cards.
Earlier this month, Scharf told stock analysts: "If you go around and talk to issuers, acquirers, merchants, we can be a little too rules-oriented. And so we've got to figure out how we become less focused on rules, while preserving what's important to keep the integrity of our network in place."
It is too early to assess the impact of Visa's new rules on its bank customers, or on the merchants that accept its cards. Numerous banks, including Wells Fargo (WFC) and JPMorgan Chase (JPM), declined to comment on the rule change, and so did the National Retail Federation.
But payments experts say that Visa's more flexible rules could have several potential benefits for both banks and merchants. First, for retailers that offer store-branded, general-purpose credit cards, the new rule will allow them to entice customers with discounts at the cash register.
"There's obviously a marketing appeal to doing that," says Glen Trudel, a partner at the law firm Ballard Spahr.
It's also conceivable that retailers will offer discounts on non-store branded credit cards issued by specific banks, but it's less clear if the economics of such arrangements make sense.
Until now, retailers that accept Visa cards were able to offer their customers rewards points or other incentives when they made purchases on store-branded credit cards, but they were not allowed to offer card-specific discounts at the point of sale, unless the customer brought along a coupon from the card issuer.
"As opposed to using a coupon … this is cleaner," Trudel says.
Visa also appears to be anticipating the proliferation of mobile wallets. Eliminating the requirement that the shopper present a coupon in order to qualify for a targeted discount could smooth the transition to mobile payments.
"We're entering into a world where the point of sale is going to become more sophisticated," says Visa's Sheedy.
The rule change could also potentially effect competition in the debit card market.
Because banks with more than $10 billion of assets are now subject to price caps on the debit swipe fees they charge retailers, merchants have an incentive to steer their customers toward using larger banks' debit cards, rather than debit cards from small banks. But Visa's rules long forbade them from doing so.
"There's clearly a market incentive for large retailers to find the lowest-cost alternative available to them when they process payments," says Kenneth Clayton, chief counsel at the American Bankers Association. "The market's going to try to drive itself to whatever that lowest-cost payment alternative is."
Under Visa's new rules, a major merchant could team up with a large bank to offer discounts to customers who pay with that bank's debit card. The bank would likely have to offer the retailer a financial incentive.
"This does entail presumably [Bank of America] or [JPMorgan Chase] or the goliaths ponying up," says Eric Grover, a payments industry consultant at Intrepid Ventures, adding that it remains to be seen whether the large banks would be willing to do so.
From the retailers' perspective, there could also be downsides to favoring debit cards from any particular big bank.
"Few consumers carry more than one debit card," notes Lee Manfred, a partner at First Annapolis Consulting. He adds that store policies favoring certain banks could spark negative reactions from customers. "Asking them to pull out a different card is a different point-of-sale experience altogether."
Scharf, who came to Visa after a long tenure at JPMorgan Chase, has said that Visa needs to find ways to change its often-contentious relationship with merchants, who have been locked in battle with the card networks both in Congress and in courtrooms.
"We need to balance their issues with others in our value chain," he told analysts this month. "It's just an extremely important concept that needs to permeate the way we think about our business. And most importantly, it's up to us to prove to them that we can actually help them grow."
But Visa's flexibility only goes so far. The rule change will not permit merchants to reject cards or to otherwise skirt Visa's "Honor All Cards" rule.
Both Visa and MasterCard require a merchant that accepts any of their credit cards to accept all of their credit cards — meaning that a store could not decide to accept to only accept cards issued by specific banks, for example. (The rule previously required stores to accept debit cards if they also accepted credit cards, but the networks were forced to lift that requirement as part of 2003 class-action settlement with merchants.)
"There's nothing about this that in any way impacts 'Honor All Cards,'" Sheedy says.
Rules like "Honor All Cards" have long been a point of contention for merchants, who say that they have little negotiating power with the banking industry over the prices they pay and the rules they must follow if they want to accept credit or debit cards.
A recent, contentious settlement of litigation would give retailers the ability to charge customers more if they wish to pay by credit card.
But there remain significant limitations on the ability of retailers to impose a surcharge, and several large merchants and retail trade groups have expressed dissatisfaction with the proposed settlement, which is awaiting final approval by U.S. District Judge John Gleeson.
For now, Visa's rule change figures to give it one competitive edge over MasterCard as the two firms compete for bank customers. Banks are likely to respond positively to the new rule because it gives them an opportunity to differentiate their own offerings from other Visa cards.
A MasterCard spokesman declined to comment on whether the company might follow Visa's lead, but said in an email: "We continually evolve our rules and processes to enhance the value MasterCard delivers to all stakeholders in the payments value chain."
For Visa, the new rule may bring near-term gains in its competition with MasterCard, but it also carries longer-term risk, Grover argues.
That's because the strength of the card networks is built on maintaining uniformity in the cards that are offered under their brand names, he says. And allowing greater flexibility to the large banks will tilt the power in their direction.
"Up until now, the thinking has been, a Visa-branded card has certain attributes, and those are uniform," Grover says. "Chase, or B of A, or Wells Fargo, are not particularly interested in promoting the Visa brand. In fact, quite the reverse."