Visa and MasterCard cut Canadian interchange fees

Interchange fees have been a vital aspect of the card payments landscape for decades. According to large payments providers, the nominal charge is absolutely critical in order to ensure financial institutions are able to cover the necessary costs of card-associated fraud prevention, systems maintenance and customer support.

This month, however, Canada’s Department of Finance announced it had struck a deal with payment giants Visa and Mastercard to cut interchange card transaction fees by an average of ten basis points. That means the typical cost of interchange will now come in at 1.4% per transaction, reduced from the current 1.5% rate. In addition, Visa and Mastercard have pledged to narrow the range of interchange rates charged to businesses for a period of five years, and will now require annual verification by an independent third party.

That narrowing range will see smaller businesses submitting lower transaction volumes benefit from a fee reduction of more than the average 10 points, at closer to 15 base points.

It’s worth noting these changes won’t come into effect until 2020, and are by no means the first round of the reductions. In 2015, the US-based providers separately agreed to lower interchange fees to the current average annual effective rate of 1.5%. According to Canada’s Department of Finance, that move has since saved local businesses some $2bn worth of fees.

The market impact of this latest round of cuts is forecast to be somewhat less dramatic, representing an estimated $250m in annual savings for SMEs, which is based on credit card sales of roughly $250bn per year.

What does that change mean for merchants?

Essentially, a medium-sized enterprise requesting card-based transactions amounting to around $5m per year would benefit from a savings of approximately $25,000 over the five-year period in which the fee reductions will be in place. Meanwhile, smaller businesses with annual card sales sitting in the region of $1m per year could now expect to receive a 15 basis point reduction, saving around $7,500 over the same five-year period.

In turn, regulators argue Canada’s business landscape should now become a far more level playing field – as large corporations will no longer possess a competitive advantage over small businesses due to their proven ability to bargain and negotiate directly for lower rates.

That being said, the government’s August announcement will not simply impact merchants and business owners. The changes will also have a sizable on impact Canadian lenders.

This is because card issuers like regional banks and credit unions tend to receive the majority of the interchange fee passed along by merchant banks, and so any significant cut in those fees will inevitably crimp revenues.

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