Payments Talk with Karl Littler: A Breakdown of the Changes to Canadian Interchange Fees

20th August 2018
Karl Littler
Karl Littler
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Following the recent announcement regarding a future reduction in interchange fees in Canada, we caught up with Karl Littler, VP of Public Affairs at the Retail Council of Canada to find out what this decision really means for the merchant community.

The big question at the moment is how have merchants reacted to news regarding the interchange reduction deal?

Well, we thought the trajectory was in the right direction but was underwhelming overall. As for the greater merchant community, there has been positive response as interchange fees are going to see a reduction, but there is far more negative outcry regarding how little of a reduction it is.

To answer the question simply, merchants are not doing cart wheels over this announcement anytime soon.

What kind of estimated annual savings should be expected across the Canadian merchant community?

Currently it is unknown what annual savings will be achieved, as the implications of the deal have yet to be quantified. These savings could depend on numerous merchant factors such as their size and cards used (premium cards vs. standard cards).  We do know that our finance minister, Bill Morneau, believes it will benefit small and medium-sized businesses (SMBs), claiming there could be an estimated savings of 250 million CAD. We agree with the minister’s belief it will benefit SMBs, but we think it is too early to tell what kind of savings will be achieved.

For a merchant looking to achieve further interchange savings, what advice can you give them on the appropriate next steps?

First, it is highly recommended merchants should review their current card processing/interchange costs and then verify if they have the best arrangements in market with their processor. Beyond this advice, merchants can look to litigation and work with consumer groups to bring it to the government’s attention, but we believe it is unlikely to see further government action on this issue.

We have seen previously from both political parties, that when in power they have only made efforts to marginally reduce interchange fees and stopped there. The reasoning behind these marginal steps have never been fully clarified, but we think it is likely due to a fear of inadvertently damaging the popular credit card rewards programs.

Karl Littler | Retail Council of Canada

Regarding litigation, there are a few ongoing litigation cases in Canada, could these cases potentially affect the regulatory environment?

The ongoing litigation cases are more of a backdrop, if anything, because they typically focus on damages as their main concern rather than leading policy changes. Additionally, these litigation cases can only go back as far as 2010 due to changes in the Canadian Competition Act. These cases also aren’t helped by the fact that Mastercard and Visa are public companies, which makes it difficult to prove they are working with banks to keep fees high. Overall, these cases do not drive public policy decisions regarding interchange fees.

Could there be free market downward pressure on interchange fees if the upcoming Real Time Payments rail manages to penetrate the retail payments space?

Well we have seen Mastercard announce the lowering of its interchange rates on its premium cards, which is set to start in January 2019, but we think this may have been to prepare for the rate reductions set to start in 2020.

As for the Real Time Payments rail, we are looking forward to seeing if it can provide an alternative method for transactions to occur between merchants and consumers, while cutting out the card networks from the arrangement.

Has there been any movement to address the high online debit card fees paid by merchants?

It’s interesting that the subject should come up, as there has been a push from the governing bodies in Canada to the card networks (Visa, Mastercard, etc.), to reduce their online cards fees and bring them more in-line with card present interchange fees. We are certainly looking forward to the outcome of this matter, as it will benefit merchants operating eCommerce platforms, in addition to their physical retail stores.

Any final thoughts on the Canadian interchange deal?

I think it should be clear that Amex is not part of the deal Mastercard and Visa made with the Canadian government, but have a separate agreement with details that have not been made known to the public yet. We think it is likely the Amex deal was negotiated because of what has been previously seen in Australia, where the lowered interchange rates for Visa and Mastercard cards resulted in benefits for Amex.

Speaking of competition law in Canada, we think in its current state it is sorely lacking, as we have seen in the cases brought to our government. We believe there may be a justification to reform it in the future, but as it stands today, we are looking to other jurisdictions to see what efforts have been made in reducing interchange fees for merchants and if there is evidence to suggest lower fees can be passed on to consumers in the form of lower prices.

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