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The federal government says it will regulate credit-card transaction fees if the financial industry does not lower costs for small businesses.

Finance Minister Chrystia Freeland’s fall economic statement, tabled Thursday, said the government will enter into negotiations with banks, payment processors, credit-card companies and businesses to lower the transaction fees that small businesses pay every time a customer pays with a credit card.

Alongside the fall economic statement, the government released draft legislation that would give it the power to dictate fees for all businesses, not just small ones.

“Should the industry not come to an agreed solution in the months to come, the government will introduce this legislation at the earliest possible opportunity in the new year and move forward on regulating credit card transaction fees,” the fall economic statement said.

The issue is politically sensitive because the fees are used by banks to fund loyalty programs, so the government also promised to protect Canadians’ rewards points during negotiations.

Reducing credit-card transaction fees has been a long-standing demand from business groups. Successive negotiations from Conservative and Liberal governments have pushed the credit-card companies to lower their charges in such a way that the average interchange fee is now 1.4 per cent of each transaction. Small businesses tend to pay a rate above the average, while large merchants pay less.

The interchange fee, which goes the financial institution issuing the card, is the largest share of a merchant’s cost for taking a credit-card payment. Some money also goes to the credit-card networks and to payment processors.

Previous reductions in credit-card transaction fees have been done voluntarily by Visa and MasterCard in response to pressure from the government or large retailers, such as Walmart.

The financial industry has always been concerned that the government could force their hand by regulating transaction fees, as other countries do. But the government has never taken that step in public, until Thursday.

Dan Kelly, president of the Canadian Federation of Independent Business, which represents 95,000 small businesses, said it was good news that the government was “finally getting serious” about addressing credit-card fees and he was pleased that business groups would have a seat at the negotiating table.

Gary Sands, senior vice-president of the Canadian Federation of Independent Grocers, said movement on the file is good, but he is still disappointed about how long it took as the Liberals first promised action in the 2021 budget.

He said one of the issues for his members is that credit card use has exploded in recent years, particularly during the pandemic.

According to Payments Canada, there were 4.5 billion transactions made with personal credit cards in 2016 for a total value of $408-billion. By 2021, that had risen to six billion transactions worth a total of $509-billion.

Transaction fees have gotten more public attention recently as the result of a legal settlement that gives businesses the power to add a surcharge for customers who pay by credit card.

However, business groups from a wide array of industries have said their members would rather not pass on the fees because they think customers would react negatively to it.

So far, the largest company to say it plans to add these surcharges is Telus Corp. Because of telecom regulations, Telus applied to the Canadian Radio-television and Telecommunications Commission to add a 1.5-per-cent surcharge for customers paying by credit card. Telus’ application triggered thousands of public complaints and the CRTC is still weighing its decision.