Canada's largest credit card companies have agreed to limit the amount they charge retailers to process transactions to 1.5 per cent of the value of what's being sold, for the next five years.
The long-rumoured move was confirmed via press release Tuesday morning, as Visa and MasterCard, which together dominate the credit payment processing industry in Canada and abroad, have agreed to cap the amount they will charge retailers at an effective average rate of 1.5 per cent.
Most consumers aren't aware that retailers pay credit card companies what's known as an interchange fee every time a credit company processes a transaction. While debit terminals usually charge a fixed fee of a couple of cents no matter the value of the goods being sold, the fees to use credit cards can range from below one per cent with some cards, to closer than three per cent or more.
So-called "premium" cards that come loaded with loyalty points and incentives for consumers to spend more have caused the interchange fees to ratchet higher in recent years, retailers say.
Fees adding up
They say they have to increase prices to keep up with those fees, to the point that the Canadian Federation of Independent Business says those fees are increasing the costs of goods for consumers in Canada by between $5 billion and $7 billion a year.
Tuesday's move will be implemented no later than April, and will be verified annually by an independent third party to ensure they're doing what they promised.
"Although the written commitments announced today by Visa and MasterCard do not represent a massive reduction in the 'swipe fees' charged to merchants, the CFIB is confident they will reduce some of the cost pressure and end the regular fee hikes that have been the norm over the past five years," the group said Tuesday.
'In the end it appears consumers bear the brunt of the change.' —Bank analyst John Aiken
The new rules also pledge that retailers are bound to see some sort of reduction in interchange fees, even if they are OK with the current system. In a statement, Visa said if any of its clients are disadvantaged because of the decision, it will terminate or amend it for them.
Karl Littler, vice-president of the Retail Council of Canada, said credit card fees have been rising for merchants since MasterCard and Visa listed in 2006 and 2008.
“If you look around the world, the prices in Australia are one third of what they are here; one fifth that level in France. So we to continue to push to see a more competitive set of fees,” he told CBC News.
Littler welcomed the deal and said he expected consumer prices would fall as a result.
Details to come
He said there are still details to be worked out before the deal is implemented next April.
“Not a lot of the details have been fleshed out. It's clear on the arithmetic both of the networks are going to have to make some across-the-board reductions — MasterCard more than Visa because their fees are higher,” he said.
Tuesday's move is technically a voluntary one, but comes after several years of pressure from Ottawa for the industry to sort the issue out.
The high fees were a bugaboo for the late Jim Flaherty, and the issue has been just as prevalent since Joe Oliver became Canada's finance minister.
"As a result of the voluntary proposals, there is no need for the government to regulate the interchange rates set by the credit card networks," Oliver said Tuesday.
Banks to earn less
It's believed the move will cost Canadian banks with MasterCard- and Visa-branded credit cards about 10 per cent of their revenues from the business — which leaves the question of how they're going to make up those lost funds.
Retailers and governments contend that cost savings at the retail level will trickle down to consumers in the form of lower prices. But as bank analyst John Aiken said in a note to clients on Tuesday, other countries that have set caps on fees haven't seen those savings passed on.
"In 2003," he said, "the Reserve Bank of Australia cut interchange fees by roughly half, believing that the cost savings to merchants would be passed on to consumers in the form of lower prices."
In reality, "to offset reduced interchange fees, issuers increased annual fees; revised reward programs; hiked interest rates on credit cards and related fees for credit card services; and reduced spending on technology innovations."
"In the end, he said, "it appears consumers bear the brunt of the change."