Merchant Credit Card Fees – Walmart Edition

A recent news item has popped up on one of my favorite topics, merchant credit card fees. Walmart Canada has announced that they will stop accepting VISA as a form of payment, with the phase-out to begin in mid-July in Thunder Bay, Ontario.

The debate over merchant fees is one that is frequently not well reported by the media, and often is nothing more than the media regurgitating some absurd clap-trap from the Canadian Federation of Independent Business (CFIB).

Often lost in the lackluster reporting is that the credit card companies like VISA and MasterCard generate their revenue from the merchant fees. Their SEC 10-k disclosures are clear, “Visa is not a bank and does not issue cards, extend credit or set rates and fees for account holders on Visa-branded cards and payment products“. It is the bank or financial institution that issues the card that gets the credit card interest and other fees. The relevance of which will become apparent shortly.

As I have written previously, merchants receive benefits from paying merchant fees, something that is too often overlooked by the media, and groups like the CFIB purposely avoid mentioning.

According to the CBC article linked above, and the statement posted to their own website, Walmart Canada pays over $100 million in merchant fees annually. Assuming the VISA share of Walmart’s sales is similar to the rest of the market (56%) assuming Walmart is averaging 1.5% merchant fee, this means that Walmart could be risking about $3.7 billion (yes, billion) in revenue for what purpose? In reality, the majority of those customers will likely (maybe grudgingly) switch to another means of payment. So the actual revenue at risk is much lower. How much lower? I have no idea.

This is likely a strategic move that has two objectives. First, to pressure VISA into giving one of the largest (the largest?) retailers in Canada a better merchant fee rate than it is getting right now. If VISA was to match MasterCard’s 1.26% merchant rate, this could save Walmart a whopping $9 million a year. This seems like a rather large bet with a rather small payoff, even if the actual revenue at risk is only a fraction of the $3.7 billion. However, the last sentence in their press release makes it clear that this is a pressure tactic:

“…and remain optimistic that we will reach an agreement with Visa.

The second objective is to pressure the customers of Walmart to use something other than VISA as a form of payment. No doubt Walmart expects many customers use Interac, since paying with a debit card is the lowest cost form of payment. Cash payment made electronically so it comes without any of the labour and administration cost of handling physical cash.

Even more likely is that Walmart feels it can drive more customers to use MasterCard, which has a lower merchant fee, or even better, drive customers to apply for, and use the Walmart MasterCard. Saving $9 million a year in merchant fees isn’t much, but if Walmart can get 375,000 Walmart MasterCard customers to carry the Canadian average credit card debt of $3800 and pay Walmart MasterCard’s 25.99% interest rate, Walmart will be generating more than $370 million in credit card interest revenue, not counting revenue from various other credit card fees.

So if Walmart can get 90% of their VISA customers to switch to another form of payment, they only need $1.4 billion in outstanding credit card debt to generate enough interest revenue to make up for the customers who refuse to change their payment method. That’s about 1.85% of the $77 billion in outstanding credit card debt in Canada.

If $1.4 billion sounds like a lot, consider this, Canadian Tire has about $11 billion in sales revenue (retail), but has well over $4.4 billion in credit card receivables. Canadian Tire generated $600 million (5.5%) in net income from over $11 billion in retail sales. Their financial service segment generated $374 million (34%) in income from $1.1 billion in revenue. Clearly it is more profitable to be providing credit to 1.8 million credit card account holders than it is to be a retailer.

Walmart doesn’t break out Canadian revenue in their financial reports, but various estimates put their Canadian revenue at $23 billion or so annually. Walmart has twice the revenue of Canadian Tire, accumulating $1.4 billion in credit card receivables that are not paid in full every month and therefore pay interest seems well within their grasp.

So if the actual revenue at stake is only 10% of their VISA sales ($370 million), those customers who will take their dollars elsewhere rather than switch payment methods, Walmart is really risking about 1.6% of their annual Canadian revenue to achieve two goals. Pressuring VISA into giving Walmart a lower merchant fee rate, which will likely succeed eventually, and sacrificing a small portion of low-margin retail sales for much higher margins from credit card interest and fees.

Slowly but surely we are moving toward a world where large retailers are nothing more than a low margin “front” for higher margin and much more profitable credit lenders.

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