Dan Kelly is president and chief executive officer of the Canadian Federation of Independent Business.
Tuesday’s federal budget took a big step forward in reducing one of the many cost pressures facing small-business owners. The budget announced a new deal to reduce Visa and Mastercard fees by up to 27 per cent for many small businesses that process these cards.
Canadians have become addicted to the rewards points that banks put on offer to entice us to take on premium cards that cost merchants the most. If your card has World or World Elite next to the Mastercard logo, or Infinite or Infinite Privilege next to the Visa logo, you should know that your dry cleaner or flower shop is paying even more in transaction fees than for the customer with a plain-vanilla credit card.
Those extra points for your trip to Disneyland are funded by your neighbourhood small business – you know, the one that was locked down for months on end and is carrying a bucket-load of pandemic-related debt.
What’s more is that Payments Canada – the non-profit responsible for the clearing and settlement of payments – reported that in 2021, the volume of credit-card use was up by a full third compared with five years earlier.
All of this causes incredible heartburn for small-business owners. Many consumers believe that they pay directly for the cost of the credit-card system through their banking fees – including annual fees to get certain cards, or the interest they pay when a balance is carried from month to month.
But those fees pale in comparison to the billions in credit-card acceptance costs that are paid by Canadian businesses. In fact, a small business would typically pay upward of 1.7 per cent of every sale (including the sales taxes) for the courtesy of using the credit-card processing system. And if a business accepts a premium card or a corporate card, or makes a sale online or over the phone, the fees can be far higher.
A merchant pays fees to three different players each time a card is used. A small share (about 0.1 per cent) goes to Visa or Mastercard directly; a medium-sized share (0.2 per cent or more) goes to the credit-card processor, such as Chase or Moneris; and a large share (1.4 per cent on average) goes to the bank that issues the card.
And Canada has far higher credit-card fees compared with many comparable economies, some of which regulate these rates.
One of the big lessons I’ve learned in fighting for lower credit-card fees for small business over the past 15 years is that the usual rules of competition are turned upside down. In most marketplaces, innovation and competition mean that choice goes up and prices come down. But in the credit-card world, the true customer of the two giant card brands is not the end consumer or the merchant accepting the card, but the issuing bank. And the card brand that delivers the highest fee revenue to the bank will be the one a bank wants to issue in the largest volume.
And, of course, the cost of rewards points – like all business expenses – eventually finds its way back into the prices we all pay. Studies show that rewards points are a bit of a reverse Robin Hood – they take from the poor and give to the well-off. Those on limited or fixed incomes using cash or debit pay the same prices as the high-end credit-card consumer who is generating loads of points to pay for their next free flight.
We at the Canadian Federation of Independent Business (CFIB) were pleased when Finance Minister Chrystia Freeland committed to alleviating the impact of credit-card fees in her fall economic statement. We’re pleased as well to see her follow up with action in Tuesday’s budget. While light on details, the budget promises to lower Visa and Mastercard processing fees for most small businesses in the months ahead, expand the direction to other cards such as American Express, and ensure that the savings are passed on to smaller merchants by payments processors.
There shouldn’t be any reason why Canada’s small merchants should continue to pay some of the highest credit-card merchant fees in the world. Tuesday’s budget may help fix this.