For many years, Canadian merchants have been forced to pay some of the highest interchange fees in the world.
According to a Bank of Canada report, in 2018 alone, Canadian merchants paid more than $11 billion for the privilege of accepting credit card payments.
But a new agreement between Visa, Mastercard, and the federal government aims to provide some relief for small business owners.
Merchants in Canada have been fighting this battle for many years now, dealing with not only the credit card companies and banks who’ve been gouging them, but also unscrupulous payment processors who’ve been taking advantage in any way they can.
Last year, we saw a small victory, stemming from a class action lawsuit that started more than a decade ago, back in 2010.
The lawsuit alleged that Visa, Mastercard, and certain banks “conspired to set higher interchange fees and to impose rules restricting merchants’ ability to surcharge or refuse higher cost Visa and Mastercard credit cards.”
And although the banks and credit card companies named in the lawsuit refused to admit any wrongdoing, they agreed to pay $131 million in settlements, allowing some Canadian merchants to claim a rebate, with the ability to submit claims expiring in September of last year.
The settlement also included a provision that gives Canadian merchants the option to impose a surcharge on credit card transactions, starting in October of last year, although to the best of our knowledge, this function still doesn’t seem to have been rolled out on most payment terminals.
In any case, many countries have decided to regulate interchange fees, in order to keep them at more reasonable levels, but for whatever reason, the Canadian government has shied away from doing this, instead spending several years trying to come to an agreement with Visa and Mastercard.
Back in 2020, the government got them to agree to bring interchange fees down by a measly 0.1 per cent, and in the feds’ 2022 fall economic statement, the government even claimed that it had draft legislation ready to go in case it felt the need to regulate these fees, but that still hasn’t happened.
Then, last month, the federal government published a press release, stating that they’d reached agreements with Visa and Mastercard that are “expected to save eligible Canadian small businesses about $1 billion over five years.”
But what exactly did Visa and Mastercard agree to? What are the stipulations surrounding these savings? And how is this going to affect your business?
If you find yourself asking these kinds of questions, and you’re wondering if your business will qualify for a reduction in interchange fees, then you’ve got to keep reading.
Because in this article, we’re going to summarize the details of these agreements, look at how this is going to affect small business owners in Canada, explain how you can ensure these savings will be reflected on your statement, and offer our take on this issue, as well.
And if you want to learn more about how this has been playing out over the last several years, you can check out our article, which asks the question, Is the Canadian Government Really Going to Regulate Interchange Fees?
How Will These Agreements Affect Interchange Fees for Small Business Owners?
According to Canada’s Department of Finance, these new agreements will allow more than 90 per cent of credit card-accepting businesses to qualify for lower interchange rates, reducing the fees they pay by up to 27 per cent.
Businesses with annual Visa sales volume of less than $300,000 will qualify for lower interchange fees from Visa, businesses with annual Mastercard sales volume of less than $175,000 will be eligible for lower interchange fees from Mastercard, and non-profits with transaction volumes below these thresholds will also be able to qualify for reduced interchange fees.
Those who qualify will benefit from lower interchange fees on domestic in-store transactions, with a new annual weighted average interchange rate of 0.95 per cent, along with a reduction of 10 basis points on interchange fees for domestic online transactions, which could result in savings of up to seven per cent.
Visa and Mastercard have also agreed to “provide free access to online fraud and cyber security resources to help small businesses grow their online sales while preventing fraud and chargebacks.”
In addition, as part of these agreements with Visa and Mastercard, Canada’s large banks have agreed to protect the reward points of Canadian consumers, despite these reductions in interchange fees.
These changes will come into effect in the fall of next year, in order to provide time to “complete the required system updates.”
Our Take on These Agreements With Visa and Mastercard
It’s great to see that small business owners in Canada will finally be getting some relief from the exorbitant interchange fees they’ve been paying for so many years.
According to both Visa and Mastercard, the average interchange rate paid on their cards in Canada is 1.4 per cent, which means that on average, for every $100 spent using these cards, a Canadian merchant will pay $1.40 in interchange fees.
That may not sound like a lot, but when you’re accepting a lot of credit card payments, these fees can quickly add up.
That being said, cutting that number down to 0.95 per cent can actually provide significant savings for small business owners.
But considering the fact that Canadian merchants paid more than $11 billion in fees for credit card processing in just a single year, saving $1 billion over five years is arguably just a drop in the bucket, so it would have been nice to see a larger reduction in fees for small business owners.
Nevertheless, this will save small businesses some money on interchange fees, and from our point of view, that’s always a good thing.
However, the statement released by the feds also included a couple of questionable clauses about the government’s “expectations” that we’d like to address, as they definitely need to be put into perspective.
For example, the statement said that “the government’s expectation is that commitments by credit card networks to lower interchange fees for small businesses will not adversely impact interchange fees paid by other businesses,” but it’s important to point out that this is simply an expectation, and not part of the agreement between these credit card companies and the federal government.
That being said, it’s yet to be seen whether Visa and Mastercard will simply download these reductions in fees onto the bills of bigger businesses, and unfortunately, nothing would surprise us at this point.
At the same time, the statement also said that the government “expects other credit card companies to take similar actions to lower fees for small businesses, and that payment processors will pass these reductions on to small businesses,” but there are so many things wrong with this statement, we’re not even sure where to begin.
First of all, the idea that other credit card companies will follow suit when they don’t even have an agreement with the government is laughable.
The government’s expectations do not constitute an agreement, so there’s really no reason for other credit card companies to do anything at this point.
Moreover, the expectation that “payment processors will pass these reductions on to small businesses” is even more absurd, as we know this is not typically how things work in our industry.
Although this is something we’re vehemently against, and would never do ourselves, many payment processing companies will use any reduction in interchange fees as an excuse to pad business owners’ bills with “miscellaneous” fees, rather than passing those savings on to their customers.
All things considered, the government’s “expectations” are nothing more than that, and so long as they don’t have agreements with these other companies, there’s no reason to believe that they’ll do what the government expects them to do.
How You Can Ensure Your Payment Processor Is Passing These Savings on to You
As we’ve already mentioned many times before, when credit card companies reduce their interchange rates, payment processors are notorious for refusing to pass these savings on to their customers.
And unfortunately, despite the federal government’s expectations, we have no reason to believe this won’t continue to be the case when these reductions come into effect.
So, if you want to ensure your payment processor is actually passing these savings on to you, there are a few things you can do.
According to the feds, “Small businesses will qualify with each credit card network individually” for these reduced rates, so it’s not quite clear how this is going to work.
Will anyone below the thresholds in question automatically qualify, without having to apply? Or will merchants have to go through an application process before they can access these savings?
At this point, no one knows for sure, but you’ll want to stay tuned to our blog and newsletter because when we do get the details, you can be sure we’ll pass them on to you.
But it’s important to remember that these changes won’t come into effect for more than a year, so in the meantime, you should make sure to stay on top of this stuff yourself, especially as we get closer to the fall of 2024.
Then, once you’ve got those details, make sure to go through any necessary application processes as soon as you possibly can, so you don’t miss out on any of these savings.
In addition, once these rate reductions come into effect, make sure to pay close attention to your monthly bills because if you’re accepting Visa and Mastercard payments, there should be savings reflected on your statement.
This isn’t always going to be true, depending on how your volume fluctuates from month to month, but most eligible business owners should notice a difference.
And if you don’t see any difference once this comes into effect, more than likely, your payment processor has taken the opportunity to pad your bill with extra fees, so make sure to pay close attention to all the fees on your statement, as well.
Alternatively, you could try to figure out how to do all the calculations yourself to be sure of exactly what you should be saving, but that process can be incredibly convoluted, not least because payment processing companies tend to structure their statements so that it’s really hard for merchants to do that.
At any rate, once this goes into effect, if you’re not quite sure what to do, we’ll be more than happy to go through your statement with you and help you figure it all out.
And who knows? We might be able to give you a better deal, regardless of whether these savings end up being reflected on your bill or not.
Are you tired of paying so much for your payment processing? Give us a call today to find out how much we can help you save.