Why Kroger's Visa ban was an uphill battle

Kroger reportedly has reversed its decision to bar Visa credit cards in its stores, demonstrating the limited effect of merchant bans in battling the payment networks.

Media outlets were reporting Wednesday that Kroger has confirmed its decision to allow customers to again use Visa credit cards, but officials with the grocery giant were not providing any details on the change of heart. Kroger did not return a request for comment by deadline.

It puts an end for now to a skirmish that drew attention to the larger retailer battles with the card brand over premium card fees.

Daniel Acker/Bloomberg

In drawing a line in the sand against Visa, Kroger might have put itself in a situation in which it not only made it harder for customers, but also might have created some in-house debates because the ban was never really a Kroger-wide policy, said Brian Riley, director of card services for Mercator Advisory Group

"You get into these funny issues of what else are you going to take, if you aren't going to take Visa?" Riley said. "I'm sure there are ways you can get bulk pricing to get some concessions along the way."

The ban was in place only in certain Kroger segments and geographic areas, making it seem as if Kroger was fragmented in its approach to Visa, Riley said.

"I think the grocery stores get good pricing now in terms of the rates," Riley added. "But grocery stores remain a very high-volume, low-margin business and that's what you have to realize."

In July of 2018, Kroger's California unit revealed its plan to stop accepting Visa credit cards, a move designed to make a statement over a dispute in swipe fees and one in which Visa declared that Kroger shoppers would be the collateral damage in such a move because it would restrict consumer choice in payments.

Earlier this year Kroger dug its heels deeper by expanding its ban on Visa credit cards to include its Smith's food and drug division.

At the high point of tension between the grocer and Visa, Kroger Chief Financial Officer Mike Schlotman stated to media outlets: "Visa has been misusing its position and charging retailers excessive fees for a long time. They conceal from customers what Visa and its banks charge retailers to accept Visa credit cards. At Smith's, Visa's credit card fees are higher than any other credit card brand that we accept."

In a similar situation two years ago, Walmart would not accept Visa credit cards in its Canadian stores. An agreement ended that ban, though neither Visa nor Walmart shared details on the type of fee adjustments it took to reach that treaty.

As the largest grocery chain in the U.S., Kroger likely has various options to engineer ways to lower costs through PIN debit network operations or having a stake in such networks, Riley said.

"I see this as a win for Visa and the entire card industry," industry analyst Ted Rossman of CreditCards.com said in a statement to the media. "We don't know the specific terms here, and maybe Kroger got a better deal, but my view is that the card bans and surcharges are consumer unfriendly and could actually hurt merchants."

Kroger also sued Visa in 2016 and halted accepting Visa debit cards over fines it endured during a conflict over debit card transaction routing. At that time, retailers were citing the Durbin amendment mandate that two or more routing options be available to retailers when moving debit transactions along the payment rails. Kroger contended that Visa was trying to force the grocer into moving more transactions along the Visa rails by citing Kroger as not having their POS terminals set up in accordance with Visa rules that called for signature or PIN for debit, with an emphasis on signature.

It was all a backdrop to the ongoing issues retailers have had with the major card brands, including the interchange fee, price-fixing challenge of the past 14 years. That tussle between retailers and the card brands has resulted in settlement offers of more than $6 billion, but many retailers have opted out because of various caveats, including the inability to sue in the future if settlement money is accepted.

A final approval hearing in that class-action case is scheduled for Nov. 7.

"There are still numerous pending lawsuits pitting merchants against card companies and their interchange fees," Rossman said. "I just don't think banning cards or charging customers more to use cards makes any sense."