Policy & Positions Manual
National Issues - Industry
Scrutiny of the Payment Industry – Benefiting the Economy as a Whole (2009)
A number of recent and troubling developments related to credit card merchant fee rates and proposed changes to debit card services raised significant concern among retailers, consumers and the business community. The convenience of debit and credit cards is being overtaken by predatory practices and the emergence of an effective monopoly in the credit card market that is threatening to fundamentally alter the nature of the debit card market.
What is at issue is something called interchange fees, which are the percentage of the total purchase price businesses pay so their customers can make a credit card purchase. These fees are among the highest in the world and can total more than two per cent per transaction. These charges have risen 4 times since October 2007 and totalled more than $4.5 billion in Canada in 2008.
The introduction of premium-type cards, which offer lavish incentive programs and benefits, have driven costs even further. Last spring, Visa launched its new Infinite premium card, which was marketed as adding valuable benefits for cardholders. Eligible Visa cardholders were automatically sent the new card. At about the same time, MasterCard reclassified some of its cardholders into a premium-type category, this time without even issuing a new card to existing cardholders.
Premium Credit Card Fees
Major credit card companies and banks offer premium cards with more perks for users. The cost for these benefits to the users is born by the merchants who are charged higher fees to process premium cards. These fees are not disclosed to the merchant and the merchant does not have the option of refusing to process the higher fee cards.
Currently, as a result of this campaign, the Senate banking committee is conducting hearings on the credit card industry, a House of Commons committee is launching a sweeping probe of credit and debit card industries, and the Competition Tribunal is investigating whether credit card networks are violating the law by charging high fees to businesses for transactions.
In addition to interchange fees, last Wednesday's Senate hearings zeroed in on the high rates of interest being charged by credit card companies. This issue prompted Ringuette to observe that, "when the bank interest rate in the '80s was in the vicinity of 16 per cent, the credit card interest rate was at 21 and 22. Now the bank rate is at 0.5 percent, and they are 19.9 per cent. There is no rhyme or reason, except greed."
Interac
Debit card services are currently supplied to Canadians by a not-for-profit company called Interac. Interac operates on the basis of a Consent Order issued by the Competition Bureau, which allows its charges for service “transaction fees” to be at a flat rate calculated to recover all operating costs only.
The level of controversy has moved beyond the credit card industry with a proposed restructure of Interac from its current not-for-profit structure to a for-profit operation which would most likely result in a new fee structure leading to higher fees for retailers, in the form of transaction fees on a percentage basis. The end result would permit Interac to bring in billions of additional dollars, all of which would be born by the consumers making purchases with debit cards. In 2007, Canadians made 3.451 billion purchases with debit cards, and between 60 to 70% of all groceries in Canada are purchased with debit cards.
Smaller merchants and retail chains apart from their consumers will suffer the most in a system that exploits their lack of negotiating power, relative to the larger chains and box stores, in establishing transaction fees for their businesses.
The Chamber recognizes that there is significant competition in the market that would normally drive both innovation and drive down prices. However, this does not seem to be the case in the payment card industry in Canada. If there is one lesson to be learned from the recent banking meltdown in the U.S., a lack of an appropriate regulation in financial services is not a healthy environment for consumers or business. There are times when government oversight and regulation is needed to protect the wider economy, and it is the Chambers view that this is clearly such a time.
THE CHAMBER RECOMMENDS
That the Federal Government ensure fairness in the payment card industry by:
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stopping further fee hikes for premium credit cards until the fairness and value can be reviewed;
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ensuring Canadians know the distribution of fees, the nature of changes and the justification for fee hikes prior to any changes;
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ensuring that new cards must be requested by consumers, not automatically sent to them without any request;
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delay any proposal to charge fees as a percentage of the sale through credit card companies until the full impact on the Canadian market can be assessed;
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working through the offices of the Competition Bureau to reject the application for change to the Consent Order as it pertains to Interac and their current systems of transaction charges; and
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amending the Credit Business Practices Regulations to prohibit extraordinary charges, born by merchants, to process premium cards.
