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Back in the summer of 2018, the federal government announced new agreements with Visa and MasterCard to lower credit-card processing costs for small and medium-sized businesses.

Although the agreements were based on voluntary commitments by the global payment networks, they were billed as a win for smaller businesses that have long complained about costly swipe fees.

But the new fee structures – which only took effect in 2020 and will remain in place for five years – are misaligned with payment trends spurred by the COVID-19 pandemic. That’s because most of the fee reductions are for sales at the cash register – transactions that are now banned for many small businesses because of government-mandated shutdowns.

There’s no denying that COVID-19 has dramatically accelerated Canada’s transition to e-commerce. No one predicted the rapid pace of change. Nonetheless, this digital shift is the new operating reality for businesses and the trend is poised to continue long past this health crisis.

Trouble is, the Trudeau government’s agreements with the payment networks were negotiated long before the pandemic, and presuppose a large proportion of in-person transactions at small businesses for the five-year term.

It’s true that processing costs for online payments have always been more expensive than in-store transactions because they carry higher risk. But given that e-commerce is now a necessity for small businesses to survive in the COVID era and beyond, Ottawa should initiate new talks with Visa and MasterCard and seek reductions of those online processing fees.

While Visa and MasterCard are not to blame for the current turn of events, a voluntary reduction of e-commerce processing costs for small businesses is the right thing to do given the current crisis.

Under the terms of their current agreements, Visa and MasterCard promised to lower their average effective interchange rate to 1.4 per cent from 1.5 per cent starting in 2020. Although those rate reductions were slightly delayed due to postponed technology updates during the pandemic, both Visa and MasterCard are in compliance with those agreements. (American Express, which negotiates its processing fee directly with merchants, struck a separate deal with Ottawa.)

Interchange, the rate set by payment networks but passed on to merchants by payment processors, comprises a large chunk of a business’s processing costs. The main beneficiaries of interchange, however, are financial institutions that issue credit cards to consumers.

Although the average effective interchange rate was lowered, fees didn’t fall for all types of payments. Visa’s rates declined for most transactions, but some of MasterCard’s e-commerce transaction fees actually increased in 2020.

MasterCard declined to provide specifics about its fee increases for online transactions, but stressed that it helps connect businesses and consumers as they adapt to the new operating realities of the pandemic.

“The value of electronic payments has never been clearer – helping businesses continue operations and providing guaranteed payment, increased sales, fraud protection, operating efficiencies and the safety of not handling cash,” MasterCard spokeswoman Sandra Benjamin said in an e-mailed statement.

She’s absolutely right. But given the rise of e-commerce during the pandemic, previous assumptions about the transaction mix that underpins the 1.4-per-cent average effective interchange rate are badly outdated. Higher costs for some online transactions could actually serve as an impediment for small businesses to transition to e-commerce and will ultimately inflate prices for consumers.

The federal Department of Finance didn’t immediately provide comment on whether it plans to review rates contained in the 2018 agreements. (Separately, Ottawa is launching a review of the Code of Conduct for the Credit and Debit Card Industry.)

An estimated 150,000 small businesses started e-commerce sites in 2020, according to the Canadian Federation of Independent Business. But there will be increased pressure for other businesses to follow suit as Canada’s 5G wireless rollout accelerates mobile shopping and the use of digital wallets over the coming years.

“Canada is an advanced economy, but its e-commerce market has been relatively slow to develop. Right now, e-commerce represents just 8.6 per cent of total retail sales,” a 2020 report by American banking giant J.P. Morgan states. “However, e-commerce sales are growing faster than in many other Western countries.”

J.P. Morgan notes that e-commerce in Canada grew by 18.3 per cent in 2018 and 17.5 per cent in 2019, and is forecasting that trend to continue at a compound annual growth rate of 15 per cent to 2023.

For all those reasons, Ottawa needs to bring Visa and MasterCard back to the (virtual) negotiating table to provide some badly needed relief for small businesses on processing costs for e-commerce transactions. And they need to provide a united front when dealing with predictable pushback from the banks.

It bears noting that the original goal of these voluntary agreements was to provide small businesses with more predictability on their processing costs. COVID-19 has turned that logic on its head.

The new fee structures are no longer fit for purpose in the digital era, which is why Ottawa and the payment networks must take action now to give Canada’s small businesses a fighting chance.

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