Payments Intelligence Extract : Canada, The Interchange Fight Is On30th October 2017
Merchants in Canada face a difficult battle against the card networks in the coming years, with Interac’s zero debit interchange fee under threat. CMSPI believes the Canadian government must protect merchants by addressing excessive Visa and Mastercard credit card interchange fees and new Interac debit card fees. Card are by far the largest payment type in Canada with an astonishing 74% of all consumer spend in 2016 taking place via bank cards (Figure 1). Additionally, cash now accounts for less than 7.5% of all consumer spending, making Canada one of the most cashless countries in the world.
Interchange is where Canada really separates itself from other economies. Interac, a Canadian non-profit interbank network that links financial institutions and other enterprises for the purpose of exchanging electronic financial transactions, has really shaken up the debit market as well as affecting fees in the credit market. With evolving regulation, an impressive propensity to pay by contactless, and a huge (but worryingly decreasing) disparity between debit and credit interchange, Canada is an exciting yet potentially complex and costly opportunity for both incumbent and prospective merchants.
The long-term trend of cash substitution continued in 2016 as Canadian consumers increasingly used financial cards for payments, with credit cards being the most commonly used non-cash retail payment method. The growth of eCommerce positively affects the use of credit cards, especially amongst young and middleaged consumers who tend to shop more online. Card payments are expected to gain an even greater share from cash as they benefit from rising merchant acceptance and the development of technology that makes card payments faster and easier. As in the U.S., credit card spending outweighs debit card spending in Canada, making up 65% (CAD 487.6bn) of all card spend in 2016 (Figure 2). The comparatively low popularity of debit cards may be due in part to their general lack of reward schemes, although these are becoming more common, which could suggest why credit cards with rewards are so widely used.
Code of conduct
In 2010, the Code of Conduct for the Credit and Debit Card Industry in Canada was introduced, and in 2015 the Canadian government revamped this to include contactless and mobile payments. In general, the code advocates transparency, fair co-badging, and greater protection for merchants. Importantly, merchants do not have to be able to accept both credit and debit card transactions from the same network, meaning that Interac can be used for all debit transactions, reducing overall costs. This code was introduced with the hope that the industry would adopt it voluntarily, but it also maintained that the government has the legal authority to regulate the industry.
Figure 1: Card Types By Transaction Value, 2016
Figure 2: Payment Types By Transaction Value, 2016
The credit card market in Canada is dominated by Visa and Mastercard – with Visa holding 57% of the market and Mastercard 30% – while the debit card market is dominated by Interac. Interac cards are co-branded with either Visa or Mastercard. Due to a significantly lower average transaction value for Interac (Figure 3) compared to Visa and Mastercard, Interac has a 58% share of the market by volume but only 35% by value.
Figure 3: Average Transaction Values
The most important detail about Interac in Canada is that its interchange fee is zero – since it is a government-regulated nonprofit organization and must justify any fees they set. Interestingly, Interac doesn’t want zero interchange – it appealed to be for-profit in 2010 but this was rejected by the Canadian Competition Bureau. Due to debit card interchange being largely zero, credit card interchange in Canada has been among the highest globally and the subject of regulatory scrutiny since 2010. On November 4th 2014, following talks with the Canadian government, Visa and Mastercard voluntarily put interchange fees down on credit cards to an average of 1.5% of total transactions — still a relatively high fee, and only for 5 years. Since credit card volumes are higher than those for debit, issuers make enough money from credit interchange fees to compensate. Canadian consumers have grown more comfortable with debt during the current period of low interest rates, with the typical resident owing $21,696 (excluding mortgage debt) in Q1 2017. For merchants, this high level of credit card spending means paying the high credit interchange fees that come with it, which may offset the savings made on debit interchange. Many merchants have voiced their opposition to these high credit interchange fees, with Walmart going so far as to refuse to accept Visa cards at some locations in 2016. Walmart claimed it was paying more than CAD 100 million per year in fees, far more than charges for any other card network. In response, Visa advertised near Walmart locations with the message that Visa is accepted in thousands of stores: a notso-subtle dig. Even less subtle, Visa also offered Manitobans CAD10 to buy their groceries anywhere but Walmart in what was part of a very high-profile spat between the two firms. A settlement was ultimately reached, although no terms of any deal were made public.
In terms of ongoing regulation, Liberal MP, Linda Lapointe, launched a private member’s bill on the 25th February 2016 entitled An Act to amend the Payment Card Networks Act (credit card acceptance fees). The Act aims to give the Governor in Council the power to set a limit on credit card interchange fees. It took 16 months for a previous bill of a similar nature to reach a committee stage, so we should see this new bill discussed shortly. Merchants are advised to keep up to date with regulatory news in order to dynamically optimize their payments acceptance, as an optimal solution now may not be optimal in future.
In Canada, most credit card spend is via transactors rather than revolvers; as such, banks see lower revenue from interest fees than if it were the other way around. That means that interchange fees on credit cards are an even more important revenue stream for Canadian banks, and they are likely to fight any regulation robustly. It is therefore probable that credit interchange fees will remain high. However, if they are regulated, we could see new fees creeping in as banks look to recoup any lost revenue. Merchants should look to the example set by European regulation and remain poised to respond to future developments.
A recent report from Canadian payments processor, Moneris, suggested that the total value of contactless transactions increased by 36.3% YOY, while the volume of transactions increased by 39.9% YOY. The total share of card transactions made using contactless is now a staggering 39.5% (Figure 5). A previous report by Moneris found a 162.5% increase in contactless spending for 2015. This all suggests that contactless spending may be progressing towards maturity following rapid growth. With 50% of all transactions expected to be contactless by the end of 2017 – and no upper limit on contactless transactions – merchants that are able to accept the payment technology will continue to benefit.
As of April 18th 2016, Interac introduced Interac Flash, a new interchange fee for all Interac contactless transactions; it amounts to up to CAD0.035 per transaction based on Interac’s qualification criteria, plus any current Interac fees. In January 2017, Mastercard decided to follow this pricing structure for contactless debit with just a different performance threshold, while Visa has set different – and higher – rates (Figure 4). Interac has also recently introduced an interchange fee of 65bps for in-app transactions, which had previously been zero, with the likely justification being that Visa and Mastercard charge 115bps. Interac’s board of directors consists mainly of representatives of Canadian banks; with interchange being a key revenue stream for banks, they may have an incentive to introduce interchange fees and increase their revenue. These new fee introductions will impact merchants significantly, as even a small fee is much more complex to cost and plan for compared to no fee. For merchants selling through multiple channels, Interac’s introduction of new fees – where there previously were none – is worrying, and could set a precedent of new fees in other areas as well.
Figure 4: Contactless Interchange Fees Per Txn (CAD and/or % of Txn)
|Network||Low ATV sector||Specified performance threshold||Base|
|Visa||–||0.15% + $0.050||0.25% + 0.050|
Figure 5: Contactless vs Total Card Spend 2016 (CAD bn)
Merchants in Canada previously faced abnormally high credit card interchange fees in an economy with heavy credit spending, and had to be content with zero interchange fees on the lesser used Interac debit cards. Now, with fees being introduced for contactless debit, and with contactless being extremely popular, merchants have been given an even worse deal coupled with the possibility of even more fee increases and new fee introductions in the future. The Canadian Government must look past Interac’s zero interchange headline rate and step in to protect merchants before they are exploited any further, else risk a dangerous precedent being set.