Visa and Mastercard May Have Just Opened the Floodgates to Competition

Source: Flickr / Doug Wertman.

Wal-Mart (NYSE: WMT  ) , the largest retailer in the world, believes that Visa (NYSE: V  ) is using its monopoly power in the credit card space to unfairly inflate transaction costs. Visa and MasterCard (NYSE: MA  ) recently agreed to a settlement that, effectively, admitted just that. Even if Wal-Mart doesn't win its case, it shows there's a huge crack in the payments industry that competitors could exploit.

Bigger than Wal-Mart?
It's hard to believe that any company can achieve leverage over Wal-Mart and its global network of nearly 11,000 stores -- and these are stores as large as 182,000 square feet. There's a good reason why Wal-Mart is known for low prices, as its size allows it to squeeze suppliers.

Source: Mike Kalasnik, via Wikimedia Commons

However, according to the retailer, Visa has the upper hand on pricing when it comes to processing fees. The late 2013 settlement between Visa, MasterCard, and "retailers" would seem to back that up. That nearly $6 billion settlement was supposed to put an end to accusations of price fixing -- until Wal-Mart and other giants backed out.

These retailers didn't like the terms of the deal and wanted the chance to go after Visa and MasterCard on their own. As a result, Wal-Mart is drawing first blood.

Bad news for some
That's bad news for Visa and MasterCard, which clearly haven't put this issue behind them just yet. At the very least that will mean continued uncertainty, additional legal fees, and potentially more big settlement costs. However, as Wal-Mart and other retail giants go after their erstwhile payment partners, there's a big opening for competitors.

(Source: Lotus Head, via Wikimedia Commons)

For example, Wal-Mart offers refills on Green Dot cards. These cards specifically target those with little or no access to banking relationships. While this is a far cry from replacing Visa or MasterCard, providing these cards allows Wal-Mart to provide bank-like services to customers. For example, for a fee, Wal-Mart will cash a check and put the money onto a Green Dot card.

With over 4,000 U.S. stores, Wal-Mart could easily turn this relationship into something more. If there's enough bad blood between Wal-Mart and Visa, don't be surprised if the low-price leader looks for alternatives.

As an example, at one point the company's Sam's Club division only accepted Discover cards. It made big news when it began to accept MasterCard, too. Clearly, Wal-Mart isn't against taking a stand in the credit card space.

Everyone needs a Pal
In fact, as eBay's (NASDAQ: EBAY  ) PayPal increasingly looks to enter the brick and mortar world, Wal-Mart might be the perfect partner. PayPal is working with Discover to process its physical world transactions. Wal-Mart clearly has a working relationship with Discover and accepts PayPal online.

It isn't much of a stretch to think the two could come to terms over getting PayPal accepted in Wal-Mart's physical stores. That would, of course, be a huge win for eBay's PayPal unit, even if it was just a way for Wal-Mart to show it was serious about it's Visa lawsuit. This is one of the reasons why PayPal could have a very bright future, even if Carl Icahn loses in his bid to get it separated out from eBay.

A long fight
Wal-Mart's fight with the major credit card companies is likely to be a long one. However, a big piece of the value in Visa and MasterCard is their market clout. If giants like Wal-Mart support alternatives, that dominance could wane. Green Dot cards and eBay's PayPal are just examples of alternatives that could get big fast with a little help from the retail giant.

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Read/Post Comments (12) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2014, at 8:50 AM, ChuckXX wrote:

    This is just one of the many reasons I hate Walmart. They are nothing more than a BULLY. Did you ever stop and think that they could just say "hey folks we no longer accept Visa at our nice Walmart store". The Visa story is starting to remind me of the Microsoft story from around 2000. Back then Microsoft was over $102.00 per share ( I know because I owned it then) and it has never recovered.

  • Report this Comment On April 09, 2014, at 9:02 AM, pondee619 wrote:

    What is a "Green Dot" card? I'll assume, for the time being, that it is a prepaid debit card to be used only at WalMart or Sams Club stores. Please correct me if my assumption is not correct.

    "... for a fee, Wal-Mart will cash a check and put the money onto a Green Dot card." Once upon a time merchants, i.e. grocery stores, packaged goods stores, local feed and grains, would cash a persons pay check without fee as long as that person shopped there.

    " Green Dot cards... specifically target those with little or no access to banking relationships." In reality, target the poor with little or no access to banking alternatives. So, FOR A FEE, WalMart will take this person's money and put it on a card that can only be used in their stores. And WalMart will convince this person that WalMart is doing them a service and they should be thankful.

    Once upon a time you could cash your pay check while doing you shopping and the only "fee" was your patronage of that store. WalMart just wants in on the price fixing.

    What is the difference between the fees charged by Visa, MasterCard, PayPal and the fee charged by WalMart to deposit into their Green Dot card? And who, initially, pays which fee? I suspect that with the Green Dot card, the holder thereof is paying twice. Once, the fee for making the deposit and again on the increased price WalMart charges to cover the Visa and MasterCard fees. Or is there a discount for using the Gren Dot card? I would be surprised if there was.

    Nope, WalMart just wants in on the price fixing. Any increased competition will not benefit the consumer.

    "Visa and MasterCard May Have Just Opened the Floodgates to Competition." So what? Will anything change? no

  • Report this Comment On April 09, 2014, at 10:29 AM, jsnod25 wrote:

    Just a quick fact update, many stores are over 200,000 sqft. Mine is just over 204,000... 182,000 is the mid size format, and 160,000 is the small size format. At least half of the over 4,000 in the US are the larger 200,000+ sqft size... Again just a fact check update!

  • Report this Comment On April 09, 2014, at 10:40 AM, jsnod25 wrote:

    As for podee619's question... You make a lot of wrong assumptions... The cards transactions are handled by Visa. You can load money for free, and there is no monthly fee as long as you load money on it for that month. It costs 3$ to initially purchase the card, and again, loading money onto it is free. This is for people who dont want or can't have a line of credit, allowing them to make online purchases without having to pay interest on purchases, since its their own money they are spending. Also allows people to carry around a cash equivalent, and if lost, can cancel the card, and be issued a new one. Not possible if you lose your wad of cash. Lastly, this is not a WalMart exclusive card, you can buy them at 7-11 and many other retail stores around the country. Facts are friendly, and research is easy...

  • Report this Comment On April 09, 2014, at 10:58 AM, jsnod25 wrote:

    In response to chuckXX, you are a fool, but not in a good way... Your referencing a tech stock, just after the 1999 boom, where the stock was at its highest. If you owned it in 2000, it was near its all time high. The stock also has split (2 for 1) since you owned it last at $102 in 2000, and having hit $41+ recently, its not too far off. Its a tech stock you bought into during the 90's tech boom, which ended in 99-2000... So, I'm sorry if you lost money, but anyone who owned a tech stock in that era can say the same about any other random tech stock. MSFT has steadily increased they're dividends, meaning if you did a DRIP you would still be sitting pretty. Not to mention, many companies who had hit their peak at that same time frame, dont even exist today.

  • Report this Comment On April 09, 2014, at 3:12 PM, sangaman wrote:

    This looks like a problem that could be solved with bitcoin... Retailers could circumvent 3rd party payment processors entirely and sharply reduce transaction fees.

  • Report this Comment On April 09, 2014, at 4:50 PM, PhilipCohen wrote:

    Bitcoin? Now at half the price it was a little while ago, you have to be joking; retailers are retailers, not stock market speculators ...

  • Report this Comment On April 10, 2014, at 10:29 AM, 1Sunbum wrote:

    "That's bad news for Visa and MasterCard" yet whalemart just announced they're contracting with mastercard/ge for their store branded cards after dumping Discover.... That makes their lawsuit against Visa look almost frivolous...

    I swear, seems to me 99% of these "financial" articles/writers seem to do all they can to be as shallow and negative as possible....

  • Report this Comment On April 10, 2014, at 12:33 PM, ggd wrote:

    Since Walmart and the others joined into the class action law suit with the other retailers, they agreed to be a part of the settlement. They gave up their right to keep suing every other year for the same thing which was a part of the settlement, they don't have a right to continue this action and it should just be dismissed. Why should they be allowed to sue, accept money and turn around and sue again a couple years later for the same thing.

  • Report this Comment On April 10, 2014, at 1:52 PM, sklarb wrote:

    To the writer- the networks that have been set up by MA and V are global in scope and will be very difficult to replicate by competitors- it would take years, if not decades. Not to mention the debit card agreements both already have in place with the federal and state governments for Social Security and other government benefit programs. And how could you write this article without reading, as an earlier poster pointed out, the switch from Discover to MA for Wal-Mart's branded in-store card which starts this summer? It makes your entire article appear poorly researched and idiotic. Oh well, I guess that's why they call it Motley Fool.

  • Report this Comment On April 12, 2014, at 10:59 AM, feawtewa wrote:

    "competitive" - "price-fixed", tomato-tomahto. Monopoly or not, everything costs the same.

  • Report this Comment On April 21, 2014, at 7:48 PM, stevebry56 wrote:

    These occasional news like court settlements tend to have a short term affect on the price of the companies. But agreed on the point that MasterCard’s outlook is strong based on fundamentals.

    http://goo.gl/5lQdPK

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