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Canada Cuts Credit Card Interchange Fee For Small Businesses

April 4, 2023
In its Budget 2023, the Canadian government said it has secured commitments from Visa and Mastercard to lower credit card interchange fees for small businesses, but some merchants say the measures do not go far enough.

In its Budget 2023, the Canadian government said it has secured commitments from Visa and Mastercard to lower credit card interchange fees for small businesses, but some merchants say the measures do not go far enough.

Interchange fees for small businesses will be reduced by up to 27 percent from the existing weighted average rate.

Under the new agreement, credit card interchange fees are capped at 1.4 percent of the purchase value.

However, there is unevenness between large and small retailers, with the former’s bargaining power meaning they can typically negotiate rates averaging 0.85 percent, while the latter typically pay close to the capped rate for accepting credit cards.

Additionally, the use of credit cards has increased following the pandemic and it is the most used payment method by Canadians with about three-quarters of all Canadians using credit cards frequently.

According to the Convenience Industry Council of Canada (CICC), credit card interchange fees have increased by 55 percent in the past 12 months and they add around $30,000 on average to the costs of merchants per year for each store.

As a result, these fees represent the second-highest cost to Canada’s convenience stores, next only to payroll, the CICC said.

The government estimates that the reduction announced in the budget will have an impact on more than 90 percent of credit card-accepting businesses and will save them $1bn over five years.

Meanwhile, the government assured that the agreement includes protection for consumer reward points offered by large banks and set the expectation that the new arrangement “will not adversely impact interchange fees paid by other businesses”.

The government said it expects other credit card companies to take similar actions to lower fees for small businesses, and that “payment processors will pass these reductions through to small businesses”.

Merchants pay a merchant discount rate (MDR) on each credit card transaction, which includes interchange fees paid to the issuer, scheme fees paid to the card networks and acquirer fees. The MDR is collected by the acquirer, which then pays the issuer and the network their respective part.

However, examples from other countries, including the UK, show that acquirers often keep the savings from the interchange for themselves and gains resulting from the reduction do not materialise in the merchant’s costs.

The government intends to address these concerns by setting out this expectation.

In addition to the interchange fee agreement, the budget stated that small businesses will have free access to online fraud and cybersecurity resources from Visa and Mastercard “to help them grow their online sales, while preventing fraud and chargebacks”.

Welcome step but also missed opportunity

The announcement got a mixed reception from merchants.

The CCIC, which represents more than 23,000 convenience stores, welcomed the announcement.

“Today’s action has been a long time in the making, and we have been working with the government to ensure the concerns of our businesses were heard,” said Anne Kothawala, CEO and president of the CICC.

At the same time, the association noted that the government should consider removing the interchange fees on the tax (GST) portion of a sale.

The Liberal’s 2019 electoral pledge included promises to take the GST out of the base on which interchange is calculated.

According to Michelle Wasylyshen, national spokeswoman of the Retail Council of Canada, the arrangement announced in the 2023 Budget “is actually of lower value than what the government committed to in 2019”.

If the interchange was calculated after deducting the tax, it would have resulted in savings of around 4 percent. The measure announced in the 2023 Budget will be under 2 percent of the total interchange costs, Wasylyshen explained.

This will save merchants $1bn out of more than $50bn of interchange over the same five-year period, “half as much as the original promise from 2019”.

Therefore, “the government missed a big opportunity to save Canadian families money in challenging times”, Wasylyshen said.

Reducing interchange fees was one of the election pledges of the Canadian government.

Last November, the government warned the card networks that they will take the issue into their hands and legislate if the industry cannot come to an agreed solution within the following months.

Meanwhile, last autumn, merchants got another tool to ease their costs of accepting credit cards. As a result of a landmark settlement with issuers, since last October, merchants are allowed to pass on these costs to consumers.

However, the ability to surcharge credit card transactions had a mixed reception and several businesses are reluctant to apply a surcharge in fear of losing their consumers.

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