(July 6, 2009) A sweeping new report from a Canadian Senate committee recommends the federal government create a payment-system oversight board, ban percentage-based debit card interchange for three years, and permit merchants to surcharge for card transactions. Those are just some of the proposals in the report as Canada confronts many of the same payment issues now working their way through the U.S. Congress.

The report from the Standing Senate Committee on Banking, Trade and Commerce emerged last week after lengthy testimony from bankers, retailers, payment executives, and others. As in the U.S., merchants are grumbling about acceptance costs, and consumer groups are taking aim at credit card issuers’ fees and interest rates. In addition, the Canadian debit market is bracing for change as the country’s affiliates of Visa Inc. and MasterCard Inc. consider new debit products and the dominant Interac Association seeks for-profit status (Digital Transactions News, Dec. 4, 2008).

Canadian merchants worry that Visa- or MasterCard branded debit cards would cost them more to accept than Interac cards, and they’re loudly protesting a new Visa premium credit card that has a higher interchange rate than regular cards.

The proposed federal oversight board should make recommendations by Dec. 31 “on any regulatory or legislative measures that it considers to be required to ensure fairness for participants in the credit card and debit card payment systems,” the report says. The board’s mandate also would include annual publication of information or trends in interchange, switch fees, and other payments fees; and establishment of a code of conduct for payment-system participants as well practices for setting fees and rates.

The report also recommends permitting merchants to bargain collectively “regarding payment card conditions and fees,” and giving the resulting agreements exemptions from provisions of Canada’s Competition Act. That proposal echoes a provision in the proposed Credit Card Fair Fee Act in the U.S. Senate that would give partial antitrust immunity to interchange agreements that merchants reach with the bank card networks (Digital Transactions News, June 12).

Other parts of the report specifically address merchant-acceptance rules, debit cards, and credit card issuance. Merchant-related recommendations include permitting retailers to surcharge for card payments or discount for cash; requiring merchants to display such surcharges or discounts; and a ban on honor-all-cards rules, a provision that would include high-cost premium credit cards as well as debit cards.

Debit card recommendations include calculation of switch and interchange fees on the basis of a flat fee, setting interchange (percentage-based debit card acceptance fees) at zero for three years, and a ban on priority network routing so that cardholders could select their preferred payment method when using a so-called co-badged debit card.

The report pays heed to many of the complaints Canadian merchants have voiced over the past year about acceptance costs and debit cards. Merchants formed the StopStickingItToUs Coalition last year to air their grievances. “The Committee has clearly recognized that market forces alone aren’t enough to defend us from the market dominance of the two major credit card companies and the banks,” Diane J. Brisebois, president and chief executive of the Retail Council of Canada, said in a statement. “The senators saw the need for government to confront abuse in the credit market, and to protect Canada’s low-cost and efficient debit system.”

MasterCard Canada issued a statement saying it welcomed the panel’s decision “to reject retail lobbyists’ calls for price regulation on credit card payment systems—an approach that would have resulted in consumers paying the price for merchants’ credit card acceptance.” MasterCard also said it “welcomes the Committee's support of competition in Canadian debit.” The network claimed that its Maestro debit product is priced on a flat-fee basis and is cheaper for merchants to accept than Interac.

Visa, the dominant credit card brand in Canada, has indicated it is eyeing the debit market and said in testimony before the Senate panel that zero interchange for debit cards “is unsustainable in the long term” due to the costs of funding innovation and providing services such as buying goods online, through mail order, or by telephone, according to a summary of testimony inside the report. Visa and Interac did not have immediate statements about the panel report, according to Canadian news accounts.

What the Canadian Senate will do with the panel’s report wasn’t immediately clear. Finance Minister Jim Flaherty is considering card-regulation proposals, and a joint committee in the House of Commons also is studying payments issues, according to the Toronto Star.