Generally speaking, when a retailer decides not to accept a certain type of credit card because of high interchange fees, American Express (NYSE:AXP) or Discover (NYSE:DFS) are the most likely to go. However, in a surprise move, some Kroger-owned (NYSE:KR) stores are no longer accepting Visa (NYSE:V) for that exact reason.

In this segment from Industry Focus: Financials, host Jason Moser and contributor Matt Frankel, CFP, discuss the news and what investors should watch going forward.

A full transcript follows the video.

This video was recorded on March 4, 2019.

Jason Moser: Matt, we're going to start this week with Visa. If Kroger had a theme song for the company right now, I can't help but think it would probably be something like Twisted Sister's "We're Not Gonna Take It." As it stands, Kroger seems like they're standing up to Visa and saying, "Look, at some point or another, somebody's going to have to start pushing back."

Matt Frankel: They are. This is definitely a play to try to get their credit card fees down, which is by far the most common reasons retailers accept one credit card over another. Generally, though, Visa is not the one they choose not to accept. American Express and Discover are by far the most common.

Moser: Visa being the biggest card out there, right?

Frankel: Right. Visa's the biggest payment card. Generally, they charge lower fees than some of the other ones. Having said that, payment processing fees are often done on a case-by-case basis. Larger companies can generally negotiate a better deal than, say, a smaller merchant can.

In this case, Kroger feels that Visa's fees that they're charging them are a little bit too high and are not accepting Visa anymore at some of their owned brands. It's not all of Kroger, but some of their own brands. It's a play to get the fees down.

Generally speaking, American Express is the one. That's why you hear the dreaded "we don't accept American Express" pretty often still. American Express, in general, their fees are about 1% higher than the others. Especially when you're talking about a business was pretty low profit margins like grocery stores, a 1% difference can be a big deal.

Moser: A tremendous difference.

Frankel: The biggest surprise to me in this case is that it was Visa. It's a common thing for a retailer to not accept one form of credit card. But because it's Visa, that's why this is big news.

Moser: I think we're in the face of both Mastercard and Visa getting ready to pass through a little bit of a price increase there, as interchange fees are going to be going up for a lot of their merchant customers. We talk a lot about it, they have these admirable competitive positions, owning the rails, essentially, Mastercard and Visa. But that doesn't mean they have pricing power to the moon. At some point or another, it's going to be pulled back either by merchants complaining about it and doing what Kroger is trying to do here, or, as we've seen before with regulations, you'll have folks in D.C. who want to get in there and try to regulate the industry a little bit, which is understandable as well. They can only raise those prices so far, so it becomes imperative that they maximize the number of those transactions.

Speaking in line with maximizing that number of transactions, we see more and more places going to cashless transactions, going to only cards. I was reading today, Hodges hit me on Twitter earlier today with note that the Mercedes Benz stadium there in Atlanta is going to be moving to cashless-only transactions for their NFL and their Major League Baseball events. That's going to be starting here soon. Essentially card and mobile payment only. They justify it for a number of different reasons. It's going to give them, obviously, the opportunity to speed up transactions because there's no cash. They're talking about how cash really dictated the whole dollar policy and their pricing scheme to begin with. There are a number of reasons why it could probably work out. I know if I go to a game somewhere, I hate having to have cash, it just sucks. You have to have a lot of it, too, if you want to buy something there, because prices are so expensive.

At least over the coming five or 10 years, I think these companies like Visa and Mastercard will at least benefit from increased transactions. Would you agree?

Frankel: They will. It's also worth mentioning that I'm not AmEx bashing.

Moser: No, no!

Frankel: AmEx and Discover have actually made a big effort to lower their fees and reduce the nonacceptance. They both realized that one of their biggest obstacles to growing their user base is the fact that they don't have universal acceptance like Visa and Mastercard do. The point being that, over the next few years, you could see increased pressure on Visa from those other two as well. Like you said, you just saw Kroger get rid of Visa in certain places because AmEx and Discover made more sense. So, that's another source of competitive pressure.

It's also worth noting that merchants, especially big ones like Kroger, really do have a lot of negotiating power. Costco is the biggest example of one that only accepts one type of credit card. If you've been to a Costco, you know they only take Visa. While they're pretty tight-lipped about how much Costco is paying, they say Visa's interchange fees for Costco are something like 0.4%, whereas the standard merchant pays between 2% and 3%. I see a lot more negotiating. Right now, Costco is the only big notorious retailer that does that. But I definitely see this negotiating coming into play with other retailers in the future.

Moser: Yeah. Certainly something for investors to keep an eye on. As that pricing power hits a limit, we'll at least see the benefit from the number of transactions continuing to go up, at least in the short run. Further down the line, something at least to ponder. How strong is the competitive advantage for companies like Visa and Mastercard and even American Express as a lot of these newfangled payments providers try to get in there and really disrupt the model?

Check out the latest earnings call transcript for Kroger.

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