Canada nears agreement on lower credit card fees

Joe Oliver, the Canadian Finance Minister, is said to be pressing credit card companies and banks to accept lower credit card fees paid by retailers, which the government claims are among the highest in the world, according to two people familiar with the talks.

The government, which flagged the issue in its 2014 budget, wants

Canadian Finance Minister Joe Oliver is pressing credit-card companies and banks to accept lower transaction fees paid by retailers

 MasterCard and Visa to voluntarily curb fees by about 10%, said one person, speaking on condition they not be identified because the talks aren’t public. The fees are set by the payment networks though the bulk of the revenue is passed on to Canadian banks – according to Bloomberg.

The cuts would lead to lower costs for retailers and threatens to erode revenue for credit-card firms and lenders including Bank of Montreal (BMO) and Royal Bank of Canada. Banks say any efforts to cut transaction fees may force them to reduce card-holder benefits or eliminate cards.

“The tools that you have are to reduce benefits to consumers, to remove cards from the marketplace because they’re no longer profitable,” Royal Bank Chief Executive Officer David McKay said yesterday at a banking conference. “Every bank is going to have a lot of unhappy customers.”

The issue has been raised during earnings calls by Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Alimentation Couche-Tard Inc.

Government Talks

“I think the retailers in general are challenged with the size or the level of the interchange fees and we’d like to see that basically changing,” Raymond Pare, chief financial officer at Laval, Quebec-based convenience store operator Alimentation Couche-Tard, said.

Retail groups have been the biggest advocates for government action on merchant fees. Joyce Reynolds, executive vice president with Restaurants Canada, an industry advocacy group, said she’s hoping for a regulated solution that will lead to more dramatic cuts.

“The banks continue to introduce richer and richer premium cards with higher fees, and those are being paid for by small business operators and by all Canadians,” Reynolds said.

Officials from the two US-based payments companies have held talks with the government in Toronto and an accord could be reached as early as this month, said two of the people. Oliver is reluctant to impose regulations and wants an industry-led solution, the people said.

‘Not Years’

Oliver told reporters in Toronto today the government promised in the budget to work with the industry on lowering merchant fees and has held talks on the matter recently to discuss a voluntary accord.

“We are looking at months, not years” for an agreement to be reached, Oliver said.

Both Visa and MasterCard declined to comment.

A voluntary pact would cover the bulk of credit-card payments in Canada. The purchase volume of 22 card issuers reached $334 billion last year, according to the Nilson Report, a payments industry network.

Canada’s card issuers, which include banks and credit unions, receive what’s called an “interchange fee” that’s passed along by the card companies. While the card networks set the fees, they don’t profit directly from interchange. The lenders use the revenue from those fees to pay for loyalty programs and cover credit-card losses.‘

‘Less Great’

With interchange fees ranging from 1 percent to 2.65%, according to Visa and MasterCard disclosures, annual revenue from these fees for financial institutions surpasses C$5 billion, based on the Nilson Report purchase volume data.

“For the banks it is a great business that will get marginally less great,” National Bank Financial analyst Peter Routledge said in a Sept. 2 interview.

Another sticking point is how MasterCard and Visa coordinate any reductions, given that MasterCard typically charges a higher fee, one person said. Among the banks, Bank of Montreal gets the most fees from MasterCard.

The Canadian government pledged in its budget to take additional measures to lower card fees for merchants. The matter has been under study by lawmakers and Canada’s competition bureau for years, amid pressure from Canadian retailers.

Court Case

Canada’s competition bureau sued Visa and MasterCard in 2010 over rules that don’t allow merchants to encourage shoppers to use cheaper payment options, and prevent them from applying a surcharge on higher-cost cards. A tribunal dismissed the case last year and said a “proper solution” to the watchdog’s concerns is a regulatory framework.

Canada has among the highest card acceptance fees in the world, almost twice as high as Europe, the bureau claimed.

Visa and MasterCard have battled for years with merchants over swipe fees in countries around the world including the US. The biggest networks in July lost their bid to dismiss more than 30 lawsuits by retailers including Target and Macy’s, which are seeking potentially billions of dollars in damages related to fees for processing transactions. Merchants have sued networks for allegedly conspiring with banks to fix swipe fees, which are charged to businesses when consumers pay with credit or debit cards.

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