Amazon & Visa Dispute: Opportunity for Affirm?

Amazon's Visa Card Decision and the Shift in Payment Preferences

This week, Amazon revealed its intention to cease accepting Visa credit cards originating from the United Kingdom. This decision stems from concerns regarding elevated interchange fees associated with these transactions.

A deadline of January 19th has been established, and Amazon is incentivizing customers who frequently utilize Visa cards with a £20 discount on a purchase, encouraging them to modify their preferred payment selection.

Expanding Trend: Beyond the U.K.

Amazon’s action mirrors previous initiatives undertaken in Singapore and Australia. In these markets, the e-commerce leader implemented a 0.5% surcharge on all transactions completed with Visa-issued credit cards.

Similar to the U.K. approach, Amazon provided customers with gift cards in those regions to promote a transition to alternative payment methods.

Challenging Transaction Fees

Amazon is leveraging its significant market dominance to negotiate lower transaction fees. A company representative stated that these fees “continue to be an obstacle for businesses striving to provide the best prices for customers.”

However, Amazon isn’t the sole entity seeking to diminish consumer dependence on expensive payment options.

The Rise of Alternative Payment Solutions

Merchants are increasingly adopting strategies to reduce reliance on traditional credit cards. These include the introduction of “buy now, pay later” (BNPL) services.

The growing popularity of digital wallets and a wider adoption of ACH or account-to-account (A2A) transactions are also contributing to this shift.

Focus on Buy Now, Pay Later (BNPL)

Let's now concentrate on BNPL and its increasing appeal to major e-commerce platforms like Amazon and Walmart.

Merchant marketplaces, including Square and Shopify, are also recognizing the benefits of offering BNPL as a payment choice to their users.

Beyond Expanded Shopping Carts

Historically, the primary advantage of Buy Now, Pay Later (BNPL) services – including providers like Affirm, Afterpay, and Klarna – centered on their ability to boost average order values and simultaneously decrease instances of cart abandonment.

The transaction fees levied by Affirm on merchants are variable, contingent upon the specifics of the installment plan offered. Factors influencing these fees include cart total, loan duration, and whether the installments are offered at 0% APR or with accruing interest.

Merchants specializing in higher-priced goods, such as Peloton or Purple, who typically extend 0% APR installments over extended periods, can anticipate merchant discount rates (fees for transaction facilitation) ranging from 4% to 8% for terms of 3-12 months, or 8% to 15% for periods of 13-60 months.

Conversely, retailers like Amazon and Walmart, offering interest-bearing installments on purchases as small as $50, generally experience merchant discount rates between 2% and 5%. Affirm’s revenue generation through interest – retained on its balance sheet or sold to capital partners – allows for these reduced transaction fees.

This contrasts with Visa’s projected interchange fees for the coming year. Traditional card fees are slated to increase to 1.99% from the current 1.9%, while premium card fees will rise to 2.6% from 2.5%.

Affirm detailed the terms of its Amazon partnership in a recent 8K filing.

Although specific percentages weren't disclosed, Amazon’s high transaction volume likely secures rates at the lower end of the 2%-5% range. Simultaneously, Amazon benefits from increased average order values and valuable data regarding customer-financed purchases.

Offering low- or no-interest installment plans encourages consumers to finalize purchases and often leads to larger overall spending compared to traditional credit or debit card payments. Moreover, BNPL is frequently perceived as a more transparent financing option for consumers.

Beyond simply increasing potential purchase amounts, BNPL services can broaden the customer base by approving individuals who might not qualify for conventional credit cards. A request for proposal, reviewed by The Wall Street Journal, revealed Amazon’s desire for “commitments to underwrite competitively to widen the acquisition funnel.”

In essence, a larger pool of potential customers spend more money, with fewer abandoned carts. This represents a beneficial outcome for major retailers like Amazon and Walmart.

Internalizing BNPL Solutions

The appeal of “buy now, pay later” (BNPL) services is significantly enhanced when organizations can realize the full spectrum of advantages without incurring standard transaction costs. This consideration likely played a role in Square’s decision to pursue the acquisition of Afterpay, an Australian BNPL provider, in a deal valued at $29 billion.

As previously noted by my associate, Mary Ann Azevedo, upon the initial announcement of the agreement:

A key driver behind Square’s move to integrate Afterpay was the opportunity to leverage the financial benefits of offering BNPL options to its entire merchant base. However, a less emphasized aspect of this acquisition is the potential to introduce an alternative payment method to credit card transactions, potentially lowering fees for Square merchants on both online and point-of-sale purchases.

Square had already begun expanding its presence with Cash App Pay, enabling Cash App users to utilize funds directly from their digital wallets for purchases from Square sellers. The increasing prominence of digital wallets will be explored in a subsequent article, but it’s important to note that transactions completed through Cash App Pay are funded via ACH banking rails, resulting in considerably lower costs compared to credit card processing.

Possessing Afterpay and integrating it with the Cash App environment allows Square to not only boost conversion rates and sales volumes, but also potentially decrease the average transaction cost for merchants operating within its network.

Although Affirm demonstrably prioritizes its autonomy and maintains a strong position, being integrated with websites representing 60% of U.S. online commerce, it’s reasonable to anticipate further consolidation within the BNPL sector, with other players being acquired by online retailers or e-commerce platforms.

Consequently, we can expect to observe an increase in BNPL collaborations and wider adoption as retailers aim to increase revenue, attract new customers, and transition away from reliance on credit cards as the primary payment option.