Ottawa's attempt to clamp down on credit card transaction fees has bogged down because of wrangling among financial institutions and an inability to find a compromise.
So-called interchange fees have been in the spotlight for years and the government promised to tackle the issue in its latest budget. Whenever Canadians pay for goods or services using a credit card, the merchant is charged a fee that is shared by credit card companies, such as Visa Canada Corp. and MasterCard Inc., and their partners, such as banks. The fee ranges from $1.50 to $3 for every $100, which is typically passed on to consumers in the form of higher prices.
In 2010, the federal Competition Bureau estimated these fees amounted to $5-billion annually. And that figure has likely soared since then, given the growing use of credit cards and the rising number of travel rewards cards, such as Aeroplan, which impose the highest interchange fee.
Initially, the Competition Bureau led the charge to lower fees, arguing that Canadians who pay for goods in cash indirectly pay the transaction fee because it is embedded in the purchase price. The bureau also argued that consumers who use basic credit cards indirectly pay more than they should because merchants typically adjust prices to reflect the highest fee.
However, in 2013, the Competition Tribunal ruled that the bureau didn't have jurisdiction to intervene, saying it was a matter for the Finance Department instead. Last February, in the federal budget, the government said it would take on the issue this year.
Progress has been hard to come by because all sides have dug in. Visa and MasterCard have made it clear they oppose any regulation. "There is no evidence, economic or otherwise, to establish that regulation is necessary. Regulation, we believe, will only harm consumers to the benefit of retailers, and none of the evidence we have seen would show otherwise." Robert Livingston, who runs Visa Canada, told the Senate banking committee in early October.
Visa and MasterCard, which service more than 90 per cent of the market, are also afraid to give the other a leg up. Negotiations on the interchange file have picked up in the past few weeks, according to people familiar with the talks, although both companies still worry that the other will benefit more from any resolution.
Visa declined to comment and MasterCard did not return requests for comment.
There are also concerns American Express might not be bound by the proposed framework, meaning the company could charge whatever fees it wants. Store-branded credit cards remain an unresolved issue as well, with questions as to whether those issued by retailers such as Hudson's Bay Co. will be bound by the same rules.
Banks are also involved in the discussions because they get a cut of the interchange fees. Sources say two camps have emerged among the financial institutions: those willing to negotiate and those not prepared to compromise.
"This is a puzzle that has plagued [finance ministers] for an awfully long time. It is one of the most complicated files out there with a million moving parts,"said Dan Kelly, president of the Canadian Federation of Independent Business. He added that changes are needed because few people are aware of the fees. "This is one of the most opaque industries in the country," he said.
Until now, Ottawa hasn't been aggressive. In September, Finance Minister Joe Oliver said he would like to see financial institutions voluntary lower their interchange fees. However, the tense behind-the-scenes negotiations suggest a heavier-handed approach by the government might be necessary.
People close to the negotiations say one proposal on the table is to cap the average interchange fee at a certain amount. While it's not clear what that amount would be, opposition to this idea among the various players illustrates just how hard it is please everyone. For example, MasterCard recently signed an agreement to be Costco's sole credit card provider. Sources say Visa is worried that the low-fee, high-volume nature of MasterCard's Costco contract will allow it to jack up fees on other cards and still have an average fee that falls under any proposed regulated maximum.
Issues like this plague the negotiations because Visa and MasterCard don't want to lose a competitive edge. Banks prefer to partner with credit card companies that charge the biggest interchange fees, so Visa and MasterCard worry any changes will benefit their rival more.
One potential solution, allowing merchants to impose surcharges to offset interchange fees, has backfired in other countries. For example, in Australia, retailers ultimately added surcharges over and above the transaction fees, taking extra profits for themselves. The government is now considering reworking the surcharge.
"To be fair to Minister Oliver, to get this right is a massively complicated affair," Mr. Kelly said.