Canadian Government Delivers On Election Pledge To Rein In Credit Card Fees

November 4, 2022
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Canada’s government has announced plans to cap credit card fees for small businesses as it seeks to deliver on election promise.

Canada’s government has announced plans to cap credit card fees for small businesses as it seeks to deliver on election promise.

On Thursday (November 3), the Canadian government announced its Fall Economic Statement, revealing plans to lower credit card fees for small businesses.

“We’re working to deliver lower credit card fees, so that small businesses don’t need to choose between cutting into their already narrow margins and passing fees on to their customers,” Chrystia Freeland, deputy prime minister and minister of finance, said announcing the mini-budget.

As part of the effort, the government will first engage with the industry, including payment card networks, financial institutions, acquirers, payment processors and businesses, and negotiate an agreement that eases the burden of small businesses, while protecting existing reward points for consumers.

Along with the mini-budget, the government also published draft amendments to Canada’s Payment Card Networks Act, which would require the governor-in-council to make regulations regarding payment card fees, including a fee cap.

Should the industry not come to an agreed solution within the coming months, the government says it will introduce the legislation “at the earliest possible opportunity in the new year”.

The proposal is part of the budget section titled “Making Life More Affordable”, which aims to introduce measures that mitigate the rising cost of living.

A tipping point for small businesses

Some business lobby groups, including the Canadian Federation of Independent Businesses (CFIB), have been pushing for the government to include credit card fees in the fall budget, arguing that those fees have become a significant cost for merchants who already operate on a small margin.

“The biggest cost of doing business is labour; the second-biggest cost used to be real estate. Interchange fees have now overtaken real estate,” Anne Kothawala, president and chief executive of the Convenience Industry Council of Canada (CICC), told local news service the Globe and Mail.

The CICC said that Canadian convenience stores typically sell products that are highly taxed, such as cigarettes and gasoline. “We collect $22.5bn per year in taxes for governments. In essence, we are being charged interchange fees on layered taxes. So, it costs Canadian convenience stores to be a tax collector,” the group’s spokesperson explained to VIXIO.

In addition, lobby groups argue that businesses in certain sectors pay more to credit card companies than what they keep for themselves.

Since 2020, the average credit card fee in Canada has been capped at 1.4 percent of the transaction value, due to a voluntary five-year agreement that the government struck with Visa and Mastercard in 2018.

However, many small businesses operate on a few percentage margins that have shrunk even further after the pandemic. According to trade organisation Restaurants Canada, local facilities that used to operate on 4 percent profit margins prior to the lockdown, now operate on around 2 percent or less.

The pandemic has also shifted consumer habits to use contactless payments more often, further increasing the costs of merchants.

The CICC said in a statement that it is pleased with the government action, but warned that convenience stores have now reached “a tipping point and we need the federal government to quickly address this growing cost to businesses”.

“Anything short of that will threaten the long-term viability of these small businesses and the communities they serve,” according to Kothawala.

Similarly, Dan Kelly president of the CFIB, said the relief “may be too slow to help deal with the immediate inflationary cost pressures facing small business”, but stressed that the direction is positive and should encourage negotiations towards an early deal.

Commenting on the news, Mastercard said the company remains committed to building a strong, innovative payments system in Canada and the card network “will continue to make itself available to the government as it continues consultations with all parties in the payments ecosystem”.

Visa did not reply to a request for comment by the time of publication.

Surcharging - not a real solution to the problem

In another victory for merchants, from October 6, Canadian retailers can surcharge credit card transactions as a result of a settlement that put an end to a six-year-long court battle between the card giants and Canadian merchants.

The settlement enables merchants to surcharge consumers and businesses up to the amount they pay for accepting a credit card, although the total surcharge is capped at 2.4 percent of the purchase price.

Surcharging is allowed in all the provinces except for Quebec where consumer protection laws prohibit surcharging. Business transactions (B2B), however, can be surcharged as consumer protection laws do not apply to those transactions.

Although surcharging could ease the burdens of small businesses, a survey published by the CFIB the day before the rule entered into force showed little appetite from smaller merchants to surcharge.

Many businesses are reluctant to use their new power in the fear of losing customers. For instance, one-quarter of the businesses said they would surcharge if their competitors do, while businesses that mainly sell B2B are more likely to surcharge than those serving consumers.

As a result, advocates of a credit card fee cap say surcharging is not a real solution to the problem as it could drive consumers, who are already struggling with the increasing cost of living, to larger competitors.

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