Canada’s Credit Card Interchange Is Going Down, But Will It Make Much of a Difference?

The Department of Finance Canada on Thursday issued its latest merchant-friendly announcement regarding payment cards, this one disclosing agreements with Visa Inc. and Mastercard Inc. for an average 10-basis-point reduction in credit card interchange for small and mid-size businesses to take effect in 2020.

The department also said American Express Co. made a separate agreement “that will support the government’s objectives of greater fairness and transparency in the Canadian credit card market.”

“The voluntary commitments announced today are good news for Canadian businesses that accept credit cards, and good news for Canadian consumers,” Finance Minister Bill Morneau said in a statement. “With lower interchange fees, businesses will be able to save money that they can use to invest, grow, and create more jobs—an important part of strengthening and growing the middle class. I thank the payment card networks for making these commitments.”

The Canadian government for years has lent an attentive ear to complaints, especially from smaller merchants, about card-acceptance costs and provisions in merchant acquirers’ contracts. The Finance Department came out with a “voluntary” code of conduct for the payments industry in 2010, a code developed with input from banks and retailers, and later obtained five-year commitments from Mastercard and Visa, effective in 2015, to get average interchange rates to down to 1.50% of the sale.

The new commitments call for Visa and Mastercard to reduce domestic interchange to an average of 1.40% for five years from the current 1.50%, narrow the range of interchange rates charged, and obtain annual verification of rates from an independent party. The department estimates the cuts will save small and mid-size merchants about C$250 million ($191.1 million) a year based on roughly C$250 billion in annual card purchases.

“These commitments from Visa, Mastercard, and American Express will make credit card acceptance fairer for small and medium-sized enterprises, which have less bargaining power than larger merchants to negotiate lower rates,” the announcement says. “The commitments will also help to maintain the card benefits—such as reward programs—that are important to Canadian consumers.”

Not surprisingly, merchants hailed Thursday’s news. “These new measures build on the positive momentum in improving the power balance between major card brands and smaller merchants that began with the adoption of the Code of Conduct for the Credit and Debit Card Industry in Canada,” Dan Kelly, president of the Canadian Federation of Independent Business trade group, said in a statement. “For years, CFIB has encouraged the payments industry to close the gap between the rates small businesses pay and those available to large firms.”

The new agreements, however, probably will have little long-term effect on Canadian payments, but they could spur a burst of account-acquisition activity by independent sales organizations, according to Adam Atlas, a Montreal attorney who works with ISOs in Canada and the U.S.

“The news becomes fuel for marketing by ISOs,” Atlas tells Digital Transactions News. “It’s very hard to get the attention of merchants; this is a way of putting a bug in the ear of every merchant in the country to begin discussions on the topic.”

The card networks issued polite statements about the coming changes. Mastercard said in a blog post that since 2015 its commitment to lower interchange “has delivered lower rates to over 700,000 businesses across the country and about $1 billion back to the business community.”

Visa said it “looks forward to continuing to work closely with the government, financial institutions, and merchants across the country to promote a competitive, efficient, innovative, and secure payment system in Canada.”

Morneau made no mention of financial terms involving AmEx. “This commitment recognizes the fact that American Express operates a unique business model with fees other than interchange fees,” the announcement says. An AmEx spokesperson could not be reached Friday.

The Canadian Bankers Association, whose members receive the interchange merchants pay, issued a statement saying that “in 2016, banks took part in Finance Canada’s review that culminated today in a further voluntary reduction in interchange rates by these payment card networks, the second such agreement since 2015.”