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After months of tense negotiations, cooler heads have prevailed over hotly-contested interchange fees. There were rumblings last week a deal had been struck between the federal government, credit card companies and the banks. It was made official with a press release this week. With an election set for 2015, there’s no doubt the federal government is breathing a sigh of relief for taking care of this issue once and for all.
Interchange Fees to be capped at 1.5%
MasterCard and Visa have voluntarily agreed to hold credit card interchange fees at 1.5 per cent for the next five years. Interchange fees will be lowered no later than April of 2015, and will be verified each year by an independent third party to ensure credit card companies and the big banks are delivering on their promise.
This certainly is good news for retailers and consumers. Many consumers don’t realize, but sky-high interchange fees can lead to higher prices. Many retailers up their prices to compensate for interchange fees, leaving customers who pay by cash, debit and basic credit card subsidizing premium cardholders.
The government had been requesting a voluntary reduction of interchange fees by 10 per cent. Although the capping of interchange fees falls short of lowering fees across the board, it’s a decent solution.
It’s the hefty fees for premium credit cards that are taking a big bite out of the bottom line of small businesses. Many small businesses were faced with a difficult situation: accept credit cards and the hefty fees that come with them, or refuse credit cards and risk losing customers. Retailers aren’t permitted to pick and choose the type of credit cards they accept (although some break the rules by applying a surcharge or only accepting credit cards for larger purchases).
Small Businesses Weigh In
Tuesday’s announcement is proof that lobbying to government for changes in policy is a worthwhile effort. The Canadian Federation of Independent Business (CFIB), a non-profit business organization representing the interests and concerns of Canadian owners of small and mid-size enterprises, weighed in on the decision.
“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,” says the group.
Lower Prices on the Way?
Canada continues to have some of the highest credit card fees in the world. Interchange fees could be one of the reasons for the price gap between Canada and the U.S.
Karl Littler, vice-president of the Retail Council of Canada, offered his two cents on what he thought the agreement would mean for consumers. Littler is satisfied with the deal and says he expects consumer prices to fall as a result.
“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,” says Littler.
The Canadian Government fully expects the benefit of lower fees to pass directly to consumers. If savings for consumers do not materialize, it’s likely this deal will be off and another fight will ensue.
The Future of Premium Credit Cards
With premium credit cards booming over the past couple years; interchange fees have been spiralling out of control. It seems like a new premium credit card pops up every month. So-called premium credit cards have been a sore spot for retailers. Small businesses have been up in arms with paying interchange fees as high as four per cent. With the interchange fees now capped, could we see rewards reduced or premium credit cards disappear? Only time will tell.
The Bottom Line
A voluntary agreement was the best case scenario for the federal government. The last thing the Conservatives wanted was the issue hanging over their heads. Avoiding government regulation is a blessing in disguise. Small businesses finally have the breathing room they’ve been asking for and consumers could soon reap the rewards of lower prices.
