Going Down?

Canada’s credit card interchange rates have already come down and, under government pressure, could be coming down again.

Snow and cold haven’t stopped Canadian bankers and retailers from trekking to the national capital of Ottawa, Ontario, this winter. The reason: to give their opinions to minister of finance William F. “Bill” Morneau about whether and how much credit card interchange should be lowered.

The Canadian arms of Visa Inc. and Mastercard Inc. in 2015 reduced their consumer credit card interchange rates enough to hit a targeted average of 1.5%, as called for in the first year of a five-year “voluntary” agreement struck in 2014 between the networks and the Department of Finance Canada. Now there’s a good chance that further reductions are in the offing.

“In order to ensure that there is, in fact, adequate competition and transparency for Canadian businesses and consumers when it comes to the fees they incur when using credit cards, the government will conduct a further assessment of the fees charged by credit card networks and review the effects of the fee reductions,” Morneau said in a statement Sept. 14.

“The government’s continued oversight of the financial-services sector aims to ensure that it remains stable and competitive, and that it meets the needs of consumers and businesses in a way that supports our belief that when you have an economy that works for the middle class, you have a country that works for everyone,” the statement continues.

The Department of Finance Canada’s new review should be done in 2017. For now, the department isn’t saying much about what might come out of it.

“The government has recently begun to conduct an assessment of the fees charged by credit card networks to ensure that the effects of these reductions are serving the interests of both middle-class Canadians and small-business owners,” says a DoFC spokesperson by email. “An update will be provided once the review has been completed later this year.”

‘A Very Big Revenue Source’

What’s driving this review? In recent years, governments under the administrations of Canada’s two leading political parties, the Conservatives and Liberals, have listened attentively to consumers’ complaints about payment cards as well as merchants’ gripes about the cost of card acceptance and network rules. Those complaints gave birth in 2010 to the voluntary Code of Conduct for the payment card industry under the late Conservative finance minister Jim Flaherty.

Updated in 2015, one of the code’s many requirements is that merchant acquirers pass on any interchange reductions to merchants in full, otherwise merchants can cancel their contracts without penalty.

Merchants view the 1.5% target as a stepping stone rather than an average they’ll be stuck with long-term. They’ve got the ear of Morneau, a top lieutenant in the Liberal administration of Prime Minister Justin Trudeau.

“Basically, merchants weren’t satisfied with the 1.5,” says Karl Littler, vice president for public affairs at the Toronto-based Retail Council of Canada, the country’s biggest retailer trade group. “So they [the DoFC] agreed to look at it.”

While merchants want card-acceptance costs to be low, bank issuers want to get as much revenue as possible from interchange. Interchange, whose rates are set by Visa and MasterCard, is the largest component of merchants’ acceptance costs and technically is assessed to acquirers, which pass on the expense to their merchant clients.

Merchants frequently accuse the networks of siding with the issuing operations of banks, which founded and then owned the networks for decades. Mastercard became a publicly held company in 2006, followed by Visa in 2008.

The 1.5% threshold reduced interchange on consumer credit card transactions by about 10%, resulting in savings of approximately $500 million annually to Canadian retailers and a loss to issuers of about $15 per active cardholder, according to a 2015 analysis by Annapolis, Md.-based First Annapolis Consulting Inc.

Littler estimates that merchants are still paying in the vicinity of C$6.7 billion (U.S. $5.1 billion at current exchange rates) in interchange annually to accept consumer credit cards. That works out to more than C$500 for each of Canada’s 13 million-plus households, he says.

“Needless to say that is a very big revenue source for the banks,” says Littler.

Not surprisingly, the banks don’t want the 1.5% level to go any lower. “This agreement has recently completed its first year of what is otherwise a five-year commitment, and has been proven to be effective so far,” a spokesperson for the Toronto-based Canadian Bankers Association says in an email message.

The spokesperson notes that retailers are not required to accept credit cards, “but do so because of the many benefits that credit cards bring to their businesses. These benefits include reaching a large customer base, efficiency, guaranteed payment, increased security and efficiency over cash, retailer choice and flexibility, the ability for retailers to reach expanded markets, and access to innovative new payment methods. Credit card innovation has powered the e-commerce revolution, enabling nearly [C]$30 billion in e-commerce sales in Canada annually.”

A Tricky Job

One reason Canadian banks want to closely guard their interchange streams is that fewer consumers are carrying interest-generating credit card balances, according to the “2016 Canadian Payment Methods and Trends” report by Payments Canada. The organization runs the country’s Automated Clearing and Settlement System, through which flows about half of Canada’s non-cash payments.

In comparing credit card usage in 2015 with that in 2011, “we see Canadians are using credit cards more as a convenient payment method rather than for borrowing purposes,” the report says. “Consumers have increased their monthly use of credit cards by 21%, while the average balance carried has decreased by 12%. Further, more Canadians paid their credit card balances in full each month in 2015 (68% up from 55% in 2011).”

A Visa Canada spokesperson says by email that “we wouldn’t speculate on where the DoFC is headed.” Mastercard declined to comment.

The networks came to the interchange accord in 2014 in part to avoid the possibility of greater restrictions that could come through formal regulation or legislation, as has happened in other countries.

In the European Union, interchange was capped in 2015 at 0.2% for debit cards and 0.3% for credit cards. The U.S., of course, has its Durbin Amendment, which caps debit card interchange at about 23 cents per transaction for issuers with more than $10 billion in assets.

The Durbin Amendment stimulated huge amounts of discussion about whether consumers ultimately benefited from interchange reductions. The availability of debit card rewards and free checking dropped after the amendment took effect in 2011. And banks and merchants took opposite sides in arguments over whether retailers were pocketing the savings or passing them on to customers in the form of lower prices.

A parallel argument is going on north of the 49th parallel during the DoFC inquiry.

“Have the reductions in interchange had any effect on merchants, have they passed that benefit on to customers” are two big questions facing the department, says David Woynerowski, a partner at First Annapolis and co-author of the 2015 report.

Meeting average targets also can create a tricky job for the networks when they set their interchange tables. That’s because issuers offer a host of standard, premium, and so-called super-premium credit cards in Canada that have different interchange rates, with the premium varieties commanding the highest rates.

Visa for the most part applied similar cuts to its interchange rates across card types, while MasterCard adjusted its rates to protect higher-rate cards as much as possible, according to First Annapolis.

Lost Revenue

The RCC’s Littler hopes the DoFC will conclude that interchange needs some more trimming. “We are hopeful that there will be some pressure,” he says, adding that he’s indifferent to how such pressure is applied, such as through another “voluntary” agreement, or more formal regulation.

“We care more about the outcome than the mechanism they use to bring it down,” he says.

And if more cuts are the order of the day, the folks at the networks will be putting on their green eyeshades once again. Merchants will celebrate, but banks might have to decide if they want to recoup the lost revenue through cuts in rewards programs or by raising interest rates and fees.

Can Wal-Mart And Visa Play Nice Now in Canada?

One of the most intense battles yet seen over payment card acceptance costs ended Jan. 6 when Wal-Mart Stores Inc. once again began accepting Visa Inc. cards at 19 Canadian stores where the giant retailer had banished them months earlier.

“We have come to an agreement with Visa which allows us to continue offering Visa as a form of payment in our (Canadian) stores,” Wal-Mart, whose Canada unit is based in Mississauga, Ontario, said in a terse statement posted on its Canadian Web site. “Customers in Manitoba and Thunder Bay, Ontario, will be able to use their Visa credit card starting Jan. 6, 2017.”

Simultaneously, Toronto-based Visa Canada issued the following statement: “Visa cardholders can once again use their Visa credit cards as a form of payment in all Walmart stores across Canada. We have come to an agreement with Walmart through which Visa credit cards will be accepted at all Canadian Walmart stores, including in Manitoba and Thunder Bay, Ontario, starting on Friday, Jan. 6.”

Whether the two leaders in their respective industries gave any concession to the other is unclear. Neither company would comment beyond its formal statement.

Wal-Mart, which for years has protested the cost of accepting major-brand credit and debit cards, first banned Visa last July at three stores in Thunder Bay, a Lake Superior city with a population of about 110,000. Wal-Mart cited what it called “unacceptably high” acceptance costs.

In October, Wal-Mart followed up by kicking Visa out of 16 more stores in the province of Manitoba, and ultimately threatened to ban Visa at all of its more than 400 Canadian outlets.

The chain said that it paid more than $76 million (U.S.) annually to accept all credit cards in Canada and needed to lower those costs. The company has not broken out its acceptance cost for Visa cards specifically. During the Visa ban, the 19 stores continued to accept other brands, including American Express, Discover, and Mastercard, as well as the Interac debit card.

Hoping to put pressure on Visa, Wal-Mart said at the start of the ban that it would roll it out in phases across Canada, but gave no timetable.

For its part, Visa deployed tactics to pressure Wal-Mart. When the Thunder Bay ban started, Visa began running a multichannel advertising campaign promoting its brand and pointing to its acceptance at 5,200 other businesses in the city.

Visa also began offering promotions, including Visa e-gift cards, to encourage spending at local grocery stores. A major seller of groceries in the U.S., Wal-Mart has been trying to boost its share of that market in Canada.

—John Stewart