With a Push From the Government, Canada’s Credit Card Interchange Is Going Down Again

Canada’s finance ministry last month 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 of Finance Canada also said American Express Co., which has a different business model than bank card issuers, 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.”

The Canadian government for years has lent an attentive ear to complaints from smaller merchants about card-acceptance costs and provisions in merchant acquirers’ contracts.

The finance ministry 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 down to 1.50%.

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 finance ministry 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.

Not surprisingly, merchants hailed the 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.

The new agreements 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 says. “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.”

Visa, Mastercard, and AmEx all 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.”

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.”