The federal government is taking aim at credit-card transaction fees as shifting shopping habits resulting from pandemic lockdowns have substantially driven up costs for many small merchants.
The budget released this week promises the government will launch consultations aimed at lowering the average charges -- known as interchange fees -- paid by merchants every time a customer pays with a credit card.
Though federal officials plan to engage with stakeholders, including credit-card issuers and merchants, about possible changes, Monday’s budget also raises the threat of legislation to regulate fees “if necessary.”
This is the third time in less than seven years that the federal government has pressured credit-card companies to lower transaction fees, which vary between retailers, types of cards and payment methods. In 2014, there was an agreement reached with Visa Canada and Mastercard Canada to lower average fees to 1.5 per cent. Then in 2018 a five-year pact was struck that included voluntary commitments to lower average fees to 1.4 per cent, starting in 2020. (American Express struck a separate deal with Ottawa.)
But COVID-19 has rapidly altered consumers’ spending patterns, creating pressure to revisit that deal. Many of the interchange fees that were reduced applied solely to payments made in stores. As public-health restrictions have forced stores to limit access or close, fewer customers are swiping, tapping, or paying in cash. As a result, businesses are bearing the brunt of higher transaction fees charged for online purchases – unless they pass those costs on to customers by raising prices.
“The pandemic has been a huge driver of credit-card interchange [fees] as people have dropped cash and have moved online,” Karl Littler, senior vice-president of public affairs at the Retail Council of Canada, said in an interview. “It is a rapidly growing cost and was a rapidly growing cost even prior to the pandemic.”
The interchange fees paid by Christina Kotiadis, co-owner of Toronto gift store Lemon & Lavender, have gone way up during the pandemic. She built an online store for the first time to process e-commerce orders, and more customers who visit the store are tapping cards to make contactless payments. She also bought a mobile terminal to take payments anywhere in the store, or at the front door, which charges higher fees than the store’s plug-in terminal. For health reasons, she allows customers to pay with cards even for small purchases and absorbs the added costs.
“I refuse to raise prices. I don’t feel good about it. Everyone is trying to stay safe, and I don’t want to raise the fee because they don’t want to use cash,” she said.
Before the pandemic, about 60 per cent of payments at independent grocery stores were made with credit cards, and the rest with cash or debit cards, according to Gary Sands, a senior vice-president at the Canadian Federation of Independent Grocers. Now, more than 90 per cent of purchases are with credit cards as online ordering and curbside pickups become more popular, and the resulting interchange fees are adding up.
“It impacts prices, it impacts the ability of small businesses to stay in business,” he said.
The government also wants to ensure small businesses are charged similar rates as those paid by large companies, which have more power to negotiate lower fees, while protecting the value of loyalty points customers have already earned.
Some of the largest retailers – such as Walmart Canada, which had a dispute with Visa over merchant fees in 2017 – are believed to have negotiated lower fees than their smaller competitors, Mr. Sands said. “It’s just not fair,” he added. “The government needs to bring those fees into a similar ballpark.”
Though the government appears to be pursuing another voluntary agreement with credit-card providers, the budget noted that it could amend a 2010 law, the Payment Card Networks Act, to create “authority to regulate interchange fees, if necessary.”
Through a spokesperson, Mastercard said it is “committed to meeting our voluntary agreement with the Government of Canada, just as we have done in the past,” and that it notified customers earlier this year “that we are reducing our rates again on e-commerce transactions as part of that commitment.”
A spokesperson for Visa Canada said the “electronic payments industry collectively has enabled Canadian consumers and small businesses to transition to a digital economy, and thrive in it,” and that Visa “will always work collaboratively” with governments, financial institutions and merchants.
The government promised “detailed next steps” in its fall economic statement later this year, but it remains to be seen how much the government is seeking to drive down transaction fees. Retailers were underwhelmed after the past two agreements government struck with Visa and Mastercard in 2014 and 2018 reduced interchange fees by 14 and 10 basis points, respectively. (There are 100 basis points in a percentage point.)
“I think we’re talking basis points that won’t move the needle,” payments consultant Scott Lapstra said in an interview. And even if the government secures a more significant cut to interchange fees, he said it will be hard to stop financial institutions that issue credit cards from revising loyalty rewards on future purchases to preserve profit margins. “The consumers are going to pay this one way or the other.”
With a report from Susan Krashinsky-Robertson.
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