Did you know – each time a credit card is used to make a purchase in-store, a fee is charged to the merchant? Ranging from 1.5 per cent to 4 per cent, these charges – known as interchange fees – have long been a point of contention among retailers. The issue has plagued the Conservative government for many years and, after announcing it would be addressed in the last Throne Speech (and with the federal election looming in 2015), the Tories are taking action. Or at least, they’re trying to.
What is Being Discussed
The federal government is asking for a voluntary reduction of credit card interchange fees by 10 per cent. With MasterCard and Visa owning over 90 per cent of the credit card market, the negotiations are ongoing.
MasterCard and Visa don’t benefit directly from interchange fees – it’s the big banks that are earning a tidy sum. MasterCard and Visa are vehemently opposed to regulation, saying there’s no proof that the savings will be passed along by retailers to consumers. However, the government may have no choice if an agreement isn’t reached soon.
This is the most recent move in the saga against the fees; earlier this year, a British-Columbia-based merchant class action lawsuit unsuccessfully challenged 12 financial institutions, including Visa and MasterCard because they “unlawfully interfered with the economic interests of merchants”. In the summer of 2013 a Federal Competition Tribunal hearing ruled against merchants’ demands to have the right of refusal against some premium credit card types.
How it Could Impact Consumers
Consumers love credit cards that come with built-in rewards – but those are some of the most expensive for credit card providers. The additional cost is then passed down to the merchant in the form of higher processing fees, who then pass on the markup to consumers. Essentially, credit card interchange fees are inflating the prices paid for goods and services. The government would like to see a voluntary reduction of interchange fees to lessen the burden for retailers, who pay for these fees directly from their bottom lines.
Like it or not, customers who pay by cash and debit are subsidizing those who pay by credit card. Retailers, especially small businesses, have been asking for years for the federal government to step in and lower interchange fees. Smaller retailers find themselves in an especially tough situation. They can accept credit cards and pay the high fees that go along with it, or not offer credit cards as a payment option and risk losing customers – it’s a lose-lose situation.
Lower interchange fees could lead to a number of unintended consequences. Although retailers will pay less fees, there’s no guarantee they’ll pass the savings onto customers. Furthermore, credit card issuers will need to find a new way to make up for the loss of revenue. That could come in many shapes and sizes, including reducing customer rewards or offering credit cards to cardholders with less than stellar credit ratings.
The Argument in Favour of Voluntary Reduction
The federal government is in the midst of intense negotiations with MasterCard and Visa. If the parties are unable to come to an agreement, regulation will be a last resort. A voluntary reduction in fees is the desired solution because it has the greatest likelihood of delivering the desired result: relief for small businesses. Countries like Australia where new regulations were introduced, led to side effects, including retailers imposing surcharges on customers.
Why the Ruling Hasn’t Occurred Yet
The issue of interchange fees is complex with no easy solution; everyone seems to be weighing in. While MasterCard and Visa seem open to lower interchange fees, both are scared of giving the other a competitive advantage.
The C. D. Howe Institute, one of Canada’s most influential think tanks, isn’t in favour of either solution. Instead of lowering interchange fees, it would like to see an increase in competition. By leveling the playing field, competitors like PayPal and Bitcoin would stand a fighting chance of being widely adopted.
Until there is an agreement, interchange fees will continue to be a sore spot for the Conservatives. This is an overly complicated matter and shouldn’t be rushed. It’s about coming to a solution that’s beneficial for all parties involved where everybody comes out a winner.
Sean Cooper is a pension analyst by day and financial journalist by night, living in Toronto, Ontario. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/