What are interchange fees -- and why do they matter?


Credit cards offer plenty of benefits to consumers - consumer protection, warrantees and rewards - but all of those perks come at a cost in the form of higher credit card interchange fees. And with more of us using credit cards for everyday purchases, credit card interchange fees have become more important than ever for merchants.

Interchange fees are the so-called "invisible fees" that merchants must pay every time you use your credit card to make a purchase. They're invisible because you don't pay them as a consumer (at least not directly). Interchange fees are paid as a percentage of purchases by merchants to credit card companies, such as Mastercard, Visa and American Express, for processing payments.

Many consumers don't realize it, but retailers do pass along interchange fees - in the form of higher prices. High interchange fees mean prices are higher than they would be if our interchange fees were in line with those in the European Union, which capped fees at 0.3 per cent. In fact, consumers who pay with cash or by debit card are actually subsidizing those who pay by credit card, since they're paying higher prices but not receiving the benefits of credit cards.

"Some retailers add an additional charge to your purchase if you are using credit or debit, or a reduced cost if you pay cash," Brenda Hiscock, certified financial planner at Objective Financial Partners, said in an emailed response to questions. "They want to offset the costs they are paying to the credit card companies, to maintain their desired profit levels."

An agreement to lower interchange fees
Businesses have long complained about excessively high interchange fees. After months of negotiations, the federal government announced a voluntary agreement with Mastercard and Visa to lower interchange fees to an average of 1.50 per cent. The five-year agreement took effect April 1, 2015.

So far, Mastercard and Visa have made good on their promise of lowering interchange fees. The federal government will keep a close eye on the credit card companies to make sure they comply.

Since interchange fees help pay for the rewards Canadians love so much, many consumers were worried that lower interchange fees would result in reduced rewards on their favourite credit cards, which happened in the UK when interchange fees were capped.

So far, however, that hasn't been the case in Canada. Credit card companies occasionally adjust their programs, but there hasn't been a mass lowering of rewards across the board.

"With so much competition for credit card business, financial institutions have chosen not to reduce benefits or rewards on their cards," Hiscock said. "This could change in the future, so it's important to review correspondence from your cardholder, to ensure that you are aware of any changes."

Small businesses upset over interchange fees
Small businesses have been very vocal about interchange fees over the years. Canadian retailers pay among the highest interchange fees in the world. Each year merchants shell out $5 billion to $7 billion in interchange fees.

The Canadian Federation of Independent Business (CFIB), which represents small- and medium-sized businesses, has been a longtime advocate for lower interchange fees. Many of these retailers have razor-thin margins to begin with, which were further squeezed by rising fees.

The CFIB successfully negotiated lower interchange fees with Mastercard in February 2017 for its 109,000 member businesses. Interchange fees were lowered from 1.44 per cent down to 1.26 per cent for regular credit cards (a decrease of 12.5 per cent), and cut as much as 22 per cent for premium credit cards.

The CFIB is in the midst of negotiating with Visa and American Express for similar agreements.

Premium credit cards offer consumers higher rewards, but come with higher interchange fees for merchants - 3 per cent or more on some cards.

"If you're looking to help out your local mom-and-pop shop, consider using a regular credit card with lower interchange fees instead of a premium credit card," Seun Adeyemi, senior financial planner at SA Capital, said in an emailed response to questions. "While big businesses may be able to afford higher fees, it can really hurt the bottom lines of small businesses."

Big business pushing back over interchange fees, too
Small retailers aren't the only ones upset over interchange fees. Big businesses are pushing back, too.

Walmart and Visa were recently in a six-month dispute over interchange fees, resulting in Walmart banning Visa transactions at its locations in Thunder Bay, Ontario and Manitoba. Walmart and Visa did reach an agreement, but the dispute shows how important interchange fees are to retailers right now.

"Look for the push-back to continue with payment processing alternatives, such as Apple Pay and Android Pay, being more readily available," said Adeyemi.

See related: Why we pay card fees -- and how to avoid them, What are the rules on credit card convenience fees in Canada?, How to save on foreign transaction fees
Published March 14, 2017

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