Canada's interchange cuts empower move beyond card payments

Daniel Acker/Bloomberg

The Canadian government is about to cut payment fees for small businesses by up to 27%, adding to international pressure on credit card companies to reduce what they charge users and find alternative sources of revenue.

Under the terms of a December 2023 agreement between Visa and Mastercard and Canada's banking regulators that goes into effect Oct. 19, the card networks will lower interchange fees for in-store payments to an average of 0.95% and cut by 10 basis points from current levels for online payments. 

The move covers businesses with less than about $240,000 in yearly Visa transactions or about $129,000 in yearly Mastercard sales. Qualifying businesses could save about $600,000 over the next five years, which would be 27% based on the government's calculations. 

Visa and Mastercard did not respond to requests for comment.

Small businesses in Canada make up a minor slice of Visa and Mastercard's global payment volume, but the new lower fees come amid international threats to payment tolls. In the U.S., the Department of Justice is suing Visa over debit-processing practices, with the DOJ threatening incentives to merchants, merchant acquirers and digital wallets to use Visa for debit routing. Mastercard in 2022 came to an agreement on a separate matter regarding the routing of tokenized card transactions at online merchants. .  

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Visa and Mastercard also face legal battles in the U.S. that could lower interchange fees. Congress is considering a bill that would tighten payment fee rules, and Illinois is attempting to outlaw interchange. 

The European Union in 2015 lowered interchange fees, replacing a system in which fees in different European countries were not transparent and differed between countries. In the U.K., the Competition Appeal Tribunal in September ruled that a lawsuit by merchants over payment fees can proceed as a class action case. The merchants are arguing interchange fees are too high and are seeking damages of about $5.2 billion. And Australia's central bank has recently tightened Visa and Mastercard payment fees. 

This international pressure comes as Visa and Mastercard try to rely less on card payments, and banks ramp up efforts to offer alternative payment options that do not require card networks.

"While Canada's move is not as precipitous as the RBA's slashing of interchange in Australia or the EU's interchange cuts, it will reduce the value of the card payment networks, inevitably cause higher fees and lower rewards and benefits for cardholders, and hurt issuer and fintech innovation," said Eric Grover, a principal at Intrepid Ventures.

Visa and Mastercard set interchange rates as payment rail providers but do not make money directly from interchange. Interchange passes between banks that manage the payment and cover about 70% to 90% of total payment charges. Visa and Mastercard collect other payment fees, but a cut in interchange fees could cause banks to encourage noncard payment options, potentially lowering Mastercard and Visa's payment volume.

"Indirectly, reduced interchange revenue could encourage banks to try to shift customers to using other methods of payment, or to impose other types of fees to their customers to make up for lost revenue," said Aaron Press, research director for worldwide payment strategies at IDC. 

These methods include pay by bank, which enables payments directly between bank accounts, bypassing card networks and lowering overall costs.

Pay by bank, or account-to-account payments, is an older payment method that is gaining fresh attention due to higher consumer prices, the growth of instant processing that makes funds immediately available and merchant unease over rising payment fees. Pay by bank's popularity has led to Visa and Mastercard offering the service in the hope of cementing client relationships, even if pay by bank cuts into card payment volume.

Visa and Mastercard have also made a series of acquisitions to boost their ability to offer services beyond card processing. Last week, Mastercard agreed to acquire Swedish technology firm Minna to improve its ability to sell subscription management services, while Visa made a deal to buy security company Featurespace.

 "Visa and Mastercard are going to seek additional revenue opportunities either way," Press said. "That said, they are always looking for ways to push back against competing payment schemes. If banks take actions to be less dependent on interchange, then those investments will become more important."