In a recent article published in the Wall Street Journal, it was reported that credit-card giant Visa offered Costco a rather princely, anti-competitive deal in 2014. At least that’s the impression conveyed by the aforementioned article. Please read on.
At the time of Visa’s bid, American Express was the only credit card Costco customers could use if they “wanted to buy everything from mega-packs of paper towels to grass-fed organic steaks.” Visa offered the retail behemoth $150 million to replace Amex at Costco warehouses, and it included a discount on swipe fees exclusive to Costco. Please keep “behemoth” in mind as you continue to read.
It’s important simply because the deal is an exhibit of sorts for the Department of Justice (DOJ) and competitors more broadly in their efforts to paint Visa as an antitrust violator. The problem for Visa’s would-be assailants is that allegedly damning stories like this one are the undoing of the case itself.
Let’s start with the consumer welfare standard that underpins the basis of antitrust. While wise minds can agree or disagree with the odd notion of federal officials well outside of commerce arrogating to themselves the power to decide what is and isn’t pro-consumer, it’s apparent from the description of the Visa/Costco deal itself that consumers were in no way harmed by it.
For one, Costco is notorious for driving extraordinarily hard bargains with those lucky enough to place products on its shelves. See behemoth up above. Precisely due to the volume of sales inside its warehouses, Costco demands the same low margins for vendors as it demands of itself.
This is important in consideration of Visa offering an exclusive interchange (swipe) fee discount to Costco. Of course it had to, and the fact that it made reduced swipe fees part of its offer was a signal that the deal described has accrued to Costco customers.
Which brings us to the deal itself. Some will no doubt be put off in first glance fashion by Visa paying for shelf space. In truth, Visa’s $150 million bid is itself a signal of just how valuable the credit-card company is to Costco, and retailers well beyond it. If Visa weren’t “everywhere you want it to be,” then there’s quite simply no way it could have bid for the Costco business in the first place.
Which is another way of asserting what’s true, that Visa’s bid was an effect of its popularity with consumers and businesses alike. Just as Costco is extraordinarily choosy about the products that make it to its shelves, so is it choosy about the financial institutions that will facilitate the clearing of its shelves.
All of which further underscores how very much Visa’s Costco bid was and is pro-consumer. Costco only enters into deals that reward its customers, and Visa was and is no exception to this truth. In other words, the surest sign that Visa’s bid for Costco’s business was competitive and pro-consumer can be found in Costco’s decision to partner with Visa. Wanting to please its customers, Costco went with the credit-card preferred by those customers.
Lastly, consider Costco on its own. Behemoth was mentioned earlier. Well, yes. Costco can claim a market cap of nearly $400 billion. This rates mention in consideration of the size of Visa’s bid. What it tells us is that Costco wouldn’t risk its wildly valuable franchise for such a relatively small sum. Not in a million years.
In truth, and as evidenced by the deal itself, Costco and Visa were looking for a way to better meet the needs of their customers. Wanting to, they entered into a partnership.
