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Kroger plans to widen Visa ban as premium-card fees hurt margins

March 1, 2019

Kroger Co., the biggest U.S. supermarket chain, plans to widen a ban on Visa Inc. credit cards to its Smith’s food and drug division, blaming rising costs from premium cards. And the grocer hasn't ruled out expanding the ban to include all of its stores.

Starting April 3, Smith’s stores won’t accept Visa credit cards, though customers can still use their Visa debit cards, the company said Friday in a statement. The ban follows Kroger’s decision in July to stop accepting Visa credit cards at its Foods Co. Supermarkets unit in California.

Kroger is responding to the growing popularity of premium cards, which come with higher swipe fees for merchants, Chief Financial Officer Mike Schlotman said in an interview. Banks including JPMorgan Chase & Co., American Express Co. and Citigroup Inc. have been offering ever increasing rewards on their high-end credit cards as a way to entice affluent customers.

“Premium-rewards cards carry significantly higher fees, and they entice the customer to use those,” Schlotman said. “When you’re in a business that has a margin of 2 percent or less, a 1 percent higher fee has a meaningful effect to the bottom line.”

The spat is the latest flare-up in retailers’ push to lower the $90 billion they pay each year in swipe fees. Major retailers have long looked for ways to cut down on such charges, including by lobbying lawmakers to lower the rates and through technology upgrades that avoid systems run by Visa and Mastercard Inc. entirely.

Smith’s employs more than 20,000 and operates 142 stores in Utah, Nevada, New Mexico, Wyoming, Idaho, Montana and Arizona.

‘Business dispute’

“It is unfair and disappointing that Kroger is putting shoppers in the middle of a business dispute,” Amanda Pires, a spokeswoman for Visa, said in a statement. Visa provides merchants access to more customers, increased sales and fraud protection, among other services, she said. “Kroger enjoys all of these benefits, and there is a cost for these services, like any other.”

Schlotman declined to comment on whether Kroger would consider further expanding the ban, though he said “every option is still on the table.” The company has already installed signs in Smith’s stores warning customers that they won’t be able to use their Visa credit cards beginning next month, he said.

“There will certainly be some consumers who don’t like the decision,” Schlotman said, adding that the company will be promoting its “1-2-3 Rewards World Mastercard,” which is issued by U.S. Bancorp, to affected customers.

Kroger has been investing in its mobile payment and co-brand card offerings in recent years as a way to encourage customer engagement and lower its card-processing costs. In 2016, the grocer sued card companies over the fees charged in the aftermath of the U.S. transition to chip technology.

Kroger’s decision to ban Visa credit cards is similar to a policy Walmart Inc. implemented in some of its Canadian stores in 2016, when the retailer clashed with Visa over card fees. That dispute ended when the two companies reached an agreement about seven months later.

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