Retailers in Canada appear to have achieved something those in the United States have failed to achieve: commitments by the Visa Inc. and MasterCard Worldwide units operating there to lower credit card interchange. And they didn't even have to challenge card brand pricing in the courts or through the government to get it.
Canada's Minister of Finance announced on Nov. 4, 2014, a plan under which the Canadian units of MasterCard and Visa will "voluntarily" slash merchant interchange, thereby forestalling government-imposed changes in the card companies' interchange models.
"These commitments represent a meaningful long-term reduction in costs for merchants that should ultimately result in lower prices for consumers," Minister of Finance Joe Oliver said in a statement. "As a result of the voluntary proposals, there is no need for the government to regulate the interchange rates set by the credit card networks."
MasterCard and Visa each submitted a proposal to reduce interchange fees to an average effective rate of 1.50 percent for the next five years, beginning no later than April 2015. They promised to ensure all merchants see lower interchange. The largest price breaks, however, will go to small and midsize merchants and charities. To ensure they keep their promises, the two card companies have agreed to annual verifications by an independent third party.
American Express Co. has made no promises to cut merchant fees. "American Express has a different business model than Visa and MasterCard," Oliver said in a statement. "It negotiates its fee directly with merchants, and merchants know their cost each time they accept an American Express credit card.
"Nevertheless, if there is a fundamental shift in the marketplace and it is determined credit card networks other than Visa and MasterCard exert market power or will soon exert market power, the government will expect that those networks voluntarily commit to reduce their credit card fees in line with the current voluntary proposals submitted by Visa and MasterCard."
In response to ongoing merchant complaints, the Canadian government has been pressing the card companies to cut interchange. Indeed, the government pledged in its 2014 budget to take steps to ensure lower card fees for retailers, and lower costs for consumers by extension. And Oliver warned the card companies they had better keep their promises. "If the reductions in interchange fees are not passed along to merchants or the overall cost of accepting credit cards increases at any time during the period covered by these commitments due to actions taken by Visa or MasterCard, the government reserves the right to rescind its acceptance of the voluntary commitments," he said.
The Retail Council of Canada said its members were "delighted" about the deal heralded by Oliver's office, but also said it intends to push for further reductions. The RCC claims to represent and lobby for about 70 percent of retail stores in Canada. "For our merchants, this is an important first step towards ending the escalation of credit card fees that have been ballooning in Canada for the past seven years – fees that, until today's announcement, went completely unchecked," said Diane J. Brisebois, President and Chief Executive Officer of the RCC. "While we've made a start today, everyone is still paying too much."
Visa Canada said it took action to forestall regulations. But if conditions change so will the company's commitment. "Visa has long maintained our opposition to regulatory approaches which impair a functioning market, and that position has not changed," Visa Canada said in a statement. "Visa believes the undertaking establishes stability and predictability for the Canadian payments industry.
"Importantly, the nature and content of the undertaking will avoid the kinds of regulatory measures that, when attempted in other markets, have left consumers worse off. … Visa enters into this undertaking with the full expectation that the government is committed to a level playing field. If Visa or our clients are disadvantaged as a result of entering into this undertaking, Visa reserves the right at any time to terminate or amend it."
Interchange has been a bone of contention between merchants, banks and the card companies worldwide. The government of Australia forced the card companies to effectively halve credit card interchange in 2003. In the United States, Visa and MasterCard have had to contend with multiple court challenges to their pricing structures.
Then there was the Durbin Amendment to the 2010 Dodd-Frank Act, which mandated cuts in debit card interchange rates – a move that has reportedly diminished U.S. card-issuer earnings by billions of dollars a year. Canadian merchants also tried, unsuccessfully, to challenge interchange in court several years ago.
Analysis by Canadian Imperial Bank of Commerce said the fee reductions will result in 0.4 percent to 0.6 percent decline in earnings per share at the nation's leading banks in 2015. A report by National Bank of Canada stated, "the announced reduction to interchange fees would have a fairly minimal impact on the earnings of the Big Six Canadian banks."
Michael Gokturk, CEO at Payfirma, an ISO with operations in the United States and Canada, said the new rates would seem to have little impact on ISOs and acquirers. "The impact of this announcement falls into one of two categories, based on how the ISOs or acquirers bill their merchants," Gokturk said. "If merchants are set up on an ERR [enhanced rate recovery] or any other model which has a component of interchange differential, then there is no obligation for the acquirer or ISO to pass along savings to the merchant. If their customer base was acquired under an interchange plus [cost-plus] model, then there will be mandatory savings to the merchant without any loss of revenue to the ISO," he said.
Gokturk added that some merchant categories may pay more under the change, depending on how the rate cuts play out. "What this means are the grocery store rates and gas station rates, which benefit from a significantly reduced interchange cost [now], would actually increase to pull the average to 1.5 percent due to the sheer volume of credit card transactions," Gokturk said. "Also, many premium card types that offer rewards and benefits to cardholders carry a much higher cost than 1.5 percent; as a result, we could see a drastic cut back of these type of rewards if the cost were to be reduced significantly."
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