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Canada’s government has announced a new agreement with Visa and Mastercard to reduce credit card interchange fees to 0.95 percent. The move has been cheered by some, while called a failure by others.
After months of negotiations, the Canadian government announced that it has finalised new agreements with Visa and Mastercard that will reduce credit card interchange fees for small businesses by up to 27 percent from the existing weighted average rate.
The cut is estimated to affect more than 90 percent of credit card-accepting businesses in Canada and save them about $1bn over five years.
Lowering credit card fees was part of the government’s election pledge almost two years ago, a promise it has been constantly reminded of by the industry and pressured to fulfil.
In its Budget 2023, the Canadian government said it had secured the commitment from the card networks to lower the fees they charge on behalf of issuers.
As per the agreement disclosed on May 18, Visa and Mastercard have agreed to reduce domestic consumer credit interchange fees for in-store transactions to an annual weighted average interchange rate of 0.95 percent.
It is reduced from the 1.4 percent cap under the existing agreement and moves small businesses closer to the estimated 0.85 percent level, which larger businesses are already believed to have negotiated.
Visa and Mastercard will also reduce domestic consumer credit interchange fees for online transactions by 10 basis points, resulting in reductions of up to 7 percent and provide free access to online fraud and cybersecurity resources to help small businesses grow their online sales.
The changes will apply to small businesses with annual Visa sales volume below $300,000 and to those with annual Mastercard sales volume below $175,000.
To mitigate potential negative consequences, the government set the expectation that the interchange fee cut on small businesses will not adversely impact the fees paid by other businesses and assured that Canada’s large banks agreed to protect Canadians’ reward points.
The government also expects other credit card companies to take similar actions to lower fees for small businesses, and that payment processors will pass these reductions on to small businesses.
The new rates will come into effect in Autumn 2024.
Business associations give a mixed reaction
The Canadian Federation of Independent Business (CFIB) welcomed the announcement, calling it a “big win” for small businesses.
CFIB president Dan Kelly thanked Deputy Prime Minister Chrystia Freeland and the presidents of Visa and Mastercard for reducing fees and providing free fraud detection tools, which he says “will be of particular help in encouraging more small firms to go digital”.
He added that the CFIB will be working to ensure that the full savings of the reduction ends up in the pockets of the merchants and will keep up the pressure on the government to ensure other card brands, including American Express, take similar measures.
The association said it estimates that around 73 percent of its members will benefit from these rate reductions.
The news had a much colder reception from the Convenience Industry Council of Canada (CICC), which labelled the move a “failed attempt”.
“Despite years of lip service to small businesses, the federal government has caved to credit card networks and the big banks who prefer the status quo,” the association said.
According to the CICC, the vast majority of small businesses will be excluded from the new scheme, which benefits only micro-sized businesses.
“Even a qualifying business will only see a maximum $1K reduction to their bottom line. This is hardly the relief we were promised.”
The CICC also came down on the fact that sales tax is included in the amount on which the interchange is calculated, which is particularly detrimental to shops that sell heavily taxed products such as gasoline, tobacco and alcohol.
The association notes that 42 percent of convenience store revenues are in tax alone.
This approach “penalises our local businesses because of their role serving as a tax collector for government”, the CICC emphasised.
US merchants push Congress for action
Reflecting on the interchange fee cut, the US Merchants Payments Coalition (MPC) took the opportunity to pressure lawmakers in the United States to follow the lead.
“If Visa and Mastercard can afford to reduce their swipe fees in Canada, there’s no reason they can’t do the same here,” MPC executive committee member and National Association of Convenience Stores general counsel Doug Kantor said in an email statement.
“US merchants and their customers pay twice as much as Canadians and seven times as much as Europeans,” he added.
“It’s time for Congress to act and at least bring competition to US swipe fees.”
Last year, lawmakers were inching closer to adopting a credit card reform in the US which would have allowed merchants to choose which payment processor they want to use when they process payments on a credit card issued by a large bank.
Despite several attempts and heavy campaigning on both sides, Congress adjourned without taking up the issue.
A spokesperson for Senator Richard Durbin has told VIXIO they are “hoping to re-introduce [the bill] soon” without providing further details about the timing or potential changes to the proposal.
