Round 1 goes to the credit card giants
But smart play is to work with merchants
As news broke that the Competition Tribunal had rejected the case against Visa and MasterCard, several dozen reporters asked for my comments on what that meant for small and mid- sized merchants in Canada.
The decision kept in place rules forcing merchants to accept all types of their cards, regardless of the cost. It also meant merchants could not add surcharges to purchases made with those cards.
On the surface, the decision is a big win for the credit card brands. The powers the Canadian Federation of Independent Business and the Competition Bureau had been seeking were designed to provide bargaining clout to merchants, who feel powerless to keep rising credit card merchant fees in check. Most told me they had no plans to surcharge or turn down more expensive cards, but that just having the power to do so would cause Visa and MasterCard to rethink future rate hikes.
With Interac debit, merchants have always had the power to surcharge but few ever do because debit costs in Canada remain low.
Consumers may feel the recent decision is a victory for them. But what many don’t realize is they are already paying these fees. The 2% to 3% of every sale Visa and MasterCard and their partners in the banks charge, translates into $ 5- billion to $ 7- billion in fees a year that are embedded in the prices all consumers pay.
Although the full details of the decision have not been released, a further read of its summary may cause credit card companies to wish the Tribunal had given the win to merchants. The Tribunal reported that as a result of the rule prohibiting surcharges, “there had been an adverse effect on competition” and recommended a regulatory framework, instead.
While small businesses are regulated down to the free cups of coffee they give customers ( sadly a real example), the credit card industry is virtually unregulated in Canada.
While Finance Minister Jim Flaherty worked with the CFIB on a Code of Conduct for the Credit and Debit Card Industry — which was adopted by all industry players and has served as ground rules to address some of the worst practices — it has not helped reduce pressure on credit card merchant fees witnessed by recent across- the- board rate hikes by Visa and MasterCard.
Increasingly, countries are moving to a regulatory solution to address the problems in their credit card industries. The European Union is considering a cap on interchange rates — the main driver of credit card fees — for merchants and consumers; Australia has capped rates, but also allows merchants to surcharge.
Regulation often has perverse effects, though. In the U. S., a regulatory solution imposed to deal with sky- high debit fees merchants capped fees at 24¢ a transaction ( vs. 5¢ paid by Canadian small merchants who are part of CFIB). While this reduced
Increasingly, countries are moving to a regulatory solution
costs on large transactions, reports indicate the cost for smaller purchases rose as the industry raised prices to the maximum allowable. For small businesses, a cap may actually have increased their total debit fees.
Despite such unintended consequences, merchants want to see quick action to address the lack of transparency, continually rising fees and the feeling of powerlessness in their relationship with the credit card industry and the banks.
If the credit card companies are smart, they will set to work with merchants to address these concerns before the hand of government intrudes. I suspect Visa, MasterCard and the banks would like a regulatory solution, such as price capping, a lot less.
We have worked with the industry and government to address challenges, such as recent rules changes to address practices by several Independent Sales Organizations who used separate leases on card machines to trap small businesses into bad deals.
However, I’m not optimistic it will heed the call to return balance to its relationship with merchants on its own. I would be delighted to be proved wrong, but I’m committed to putting all options on the table to address these issues.