Everyone loves credit cards, but the industry gets polarized when the word “interchange” comes up. Interchange, the fee charged to merchants for the use of the branded network payment rails, is not a new concept. It goes back to the early days of credit cards where member banks were looking to defray the costs of network development and the fraud risk associated with payment acceptance. Today, credit card interchange ranges from a low of 30bps in Europe to a high of nearly 2% as you can see in this chart by the Kansas City Federal Reserve.
Canada has been relatively innovative and protective of their payments business. You will find protectionism in the Bank Act of 1964, which made it hard for US banks to forge into the market. Up until 2008, Canadian Banks could only issue either Mastercard or Visa products, unlike the rest of the world that permitted “duality”. Canada made a good run (but failed) at electronic money with MintChip. Moreover, the bank-owned debit clearance network, Interac, is a free network that competes head-on with Mastercard and Visa.
Today’s Friday Read talks about interchange reform. The story is very similar to Australia. Banks want a return on the network investment for building a payments system; merchants cry that fees are too high, though when rates go down, consumers never see a benefit.
Visa Inc. and Mastercard Inc. agreed to cut Canadian credit-card transaction fees in a move that could save smaller businesses C$250 million ($192 million) a year and crimp revenue for Canadian lenders.
The U.S. companies agreed to reduce the average annual interchange rate in Canada by 10 basis points to 1.4 percent on cards, Canada’s finance department said Thursday.
The agreement follows a similar move in April 2015, when Visa and Mastercard lowered their average interchange rate to 1.5 percent on Canadian cards in a five-year commitment amid pressure from the federal government.
Ten bps here, ten bps there, before you know it, this will become an issuer’s nightmare as Australia has become. Before you know it, rewards and cheap credit will be a thing of the past.
Merchants may win, but long range, consumers, and banks may not. In many ways, this is loonie.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group