Competition checks Visa fees

In its latest financial results at the end of March, Dollarama, a Canadian store chain specializing in low-priced products, announced it would accept major credit cards. Previously only cash and debit were accepted. The announcement is the latest development showing the superiority of markets to government regulations in setting prices and contract terms in the rapidly evolving world of payments.

Merchants worldwide were growing frustrated over interchange fees, which are charged to the merchant and passed on to financial institutions. Charges varied by credit card with premium cards costing merchants more for transactions than basic cards. Premium cards provide customers with perks such as reward points and travel insurance, making them more expensive for financial institutions to offer. Credit card agreements restricted merchants from encouraging lower cost payment methods. Merchant associations called for regulation including limits on fees.

In 2010, the Competition Bureau sought an order from the Competition Tribunal prohibiting card companies from three practices: constraining merchants’ ability to promote lower-cost payment methods, applying surcharges to customers that select higher-cost payment methods and declining to accept some credit cards. The tribunal sided with credit card companies and financial institutions by dismissing the application in 2013. Regulation in Canada governing fees is now a “voluntary” code introduced by the federal Department of Finance that covers issues such as notice for fee increases and permitting merchants to offer a discount for lower-cost payment options. If any merchants are currently offering these discounts, they are hard to find.

In making its decision, the tribunal examined evidence from other jurisdictions with similar prohibition and found some unintended consequences. When Australia restricted credit card companies from prohibiting surcharges, some merchants introduced surcharges that exceeded credit card fees. Merchant frustration was replaced with consumer frustration. Some jurisdictions now regulate merchants’ use of surcharging to offset the impact of the regulation introduced on credit cards. A 2015 study by the Reserve Bank of Australia found adverse impacts from a cap on interchange fees. Annual fees paid by consumers increased and rewards moderated. Interchange fee caps in the EU prompted some financial institutions to stop issuing reward cards altogether.

It seems that in the absence of the regulation sought by the Competition Bureau, merchants used their own market power to address their concerns. Walmart Canada threatened last year to stop accepting Visa because of the fees charged, and did stop accepting Visa in a few small markets. The dispute ended with Walmart successfully negotiating an agreement with Visa for the use of the cards in all its stores.

Shortly after the Walmart disagreement with Visa was resolved, the Canadian Federation of Independent Business (CFIB), an association representing small business, showed that companies without the size of Walmart can also negotiate better deals. The CFIB has advocated more fee regulation, including limits on interchange fees, but in the absence of regulated caps, it was able to negotiate a deal with MasterCard that allowed its members to get the same rate as individual merchants with over $3 billion in MasterCard sales.

It was no surprise that Dollarama has not accepted credit cards to date. Its business model of selling very inexpensive goods left little margin for payments costs. However, Dollarama has negotiated satisfactory fee structure agreements. This may not have been possible if fee structures were governed by regulations that imposed less flexibility over pricing terms. With new payment technologies such as mobile phone applications emerging, a more competitive environment should benefit both the users of payment methods and their customers. Regulators should keep in check any inclination to regulate contract terms or prices.