WATCH: Visa Canada and MasterCard Canada have made a voluntary agreement, at the urging of the Federal government, to cut transaction fees collected from merchants. But, will the savings be passed on to consumers? Eric Sorensen reports.
The country’s two biggest credit card networks, Visa Canada and MasterCard Canada, have agreed to cut fees collected from merchants on transactions.
The voluntary agreement, made at the urging of Ottawa, means retailers from big-box chains to small mom-and-pop convenience stores across Canada will soon start collectively saving hundreds of millions in fees paid to Visa and MasterCard as well as the banks.
Retailers suggest those savings will be passed on to shoppers in the form of lower prices – though that remains a matter of debate.
So-called “interchange” fees currently range between $1.50 and $3 or more for every $100 worth of transactions, depending on the credit card.
Federal Finance Minister Joe Oliver said Visa and MasterCard have agreed to slash interchange charges by “approximately” 10 per cent, which amounts to as much as $400 million annually.
“These commitments represent a meaningful long-term reduction in costs for merchants that should ultimately result in lower prices for consumers,” the minister said.
The lower effective rate of 1.5 per cent will be frozen for five years, the Finance Department said Tuesday.
Premium cards, costs
The Retail Council of Canada, a trade organization representing retailers, says premium cards that come attached to rich loyalty programs — cards which have flooded the market in recent years — have inflated interchange charges for merchants. In turn, retailers have passed those costs onto shoppers through higher pricing.
The high transaction fees commanded by such cards are split between the credit card networks – Visa and MasterCard namely – and Canada’s banks and credit unions, with the bulk taken in by the financial institution.
‘This is an important first step towards ending the escalation of credit card fees’
The country’s six big banks of TD, RBC, Scotiabank, BMO, CIBC and National Bank collect the lion’s share, using a portion to fund their own loyalty card programs, and the rest to boost their bottom lines.
Tuesday’s decision will ensure “all merchants” will see a reduction in fees, with Visa and MasterCard agreeing to implement the reductions no later than April 2015.
“This is an important first step towards ending the escalation of credit card fees,” Diane Brisebois, chief executive of the Retail Council of Canada, said. Brisbois added though that “even at these rates Canadian retailers are still paying some the highest credit card fees in the world.”
“This proposal is thoughtful in how to bring relief to merchants while maintaining a balance in the complicated payment industry with many players,” MasterCard Canada said in a statement.
American Express, the country’s No. 3 credit-card network with a much smaller share of Canadian credit card transactions compared to Visa and MasterCard, is not part of the agreement. Finance officials said they are “pleased” with Amex’s current business model, which “negotiates fees directly with merchants” who “know their cost each time they accept an American Express credit card.”
Higher fees elsewhere?
Critics of the agreement say forcing banks and credit card firms into accepting lower rates on interchange fees, either directly or indirectly, will have consequences.
“There’s no free lunch in the world, so what the bank will do is recover these fees in another manner, like on chequing accounts or some other area,” Ian Lee, a business professor at Carleton University in Ottawa, said.
Lee said there’s evidence from other countries where lower fees have been mandated that retailers pocket the savings rather than passing them on. Retail association officials suggest as much as 70 per cent of savings is passed through to consumers.
“I think that argument is bogus,” the academic said.
Others suggest that perks and rewards offered by loyalty programs could be scaled back with the reduction in fees that fund them.
“It is possible that this could translate to them altering their current rewards, to make up for the losses,” said Penelope Graham, editor at credit card program tracking site ratesupermarket.ca.
RBC, which operates the Avion rewards program for its credit card customers, will “endeavor to ensure their benefits are preserved,” a spokesperson said, “to the extent possible.”
Back and forth
The agreement comes after years of back-and-forth among retailers, the federal government, banks, credit card companies and the Competition Tribunal.
The federal Competition Bureau estimated in 2010 that credit card acceptance fees added up to $5 billion annually – a figure that has likely gone up since – with about $4 billion of that coming in the form of interchange fees.
Last year, then-finance minister Jim Flaherty told the card companies and banks to work out a new, lower-cost framework or Ottawa would for them.
Governments in Europe and elsewhere have been moving to limit transaction fees associated with credit cards in recent years, concerned about their upward rise and impact on consumers.
There are roughly 76 million credit cards issued to Canadians, who use them to pay for about half their overall purchases.
The Retail Council of Canada says the rise of interchange fees has forced merchants to incorporate the added costs into prices, tantamount to a general tax on all retail purchases regardless of how a consumer chooses to pay.
The industry association estimates that as much as $400 million will be saved through reducing rates, and most of that will end up back in the pockets of shoppers.