I Interchange Rates I Competition I Regulation I Merchant Participation in Electronic Payment Systems I
I Other I DEBIT I
INTERCHANGE
Myth: Canada’s interchange fees are the highest in the world.
Fact: MasterCard’s Canadian interchange rates remain well below those of other developed markets including the United States and well below similar fees for American Express in Canada. A sampling of other countries with higher blended interchange rates than Canada include Argentina, Brazil, Germany, Greece, Indonesia, Japan, Philippines, Poland, Portugal, Switzerland, Taiwan, Turkey and Uruguay.
The claim that a country has the highest interchange rate in the world is a consistent part of the retail lobby’s global campaign. They make the same claim wherever they launch such a campaign.
Myth: MasterCard interchange rates are “skyrocketing.”
Fact: The recent MasterCard Canadian interchange rate adjustments resulted in dramatic decreases in some interchange categories as well as some modest increases in others. These were the first adjustments in seven years.
Myth: Interchange revenue goes to the credit card companies.
Fact: MasterCard does not receive any revenue from interchange.
Myth: Merchants receive little or no warning of changes to interchange rates.
Fact: MasterCard provides 6 months notice to acquirers of any interchange rate adjustments. Acquirers, in turn, notify merchants. Typically merchants receive between 30 and 120 days notice.
Myth: A significant number of MasterCard credit cards have been classified as premium.
Fact: Premium cards represent less than 6 per cent of MasterCard’s total card market in Canada.
Myth: Interchange fees should be charged at a flat rate because they only cover the cost to process a transaction and all transactions cost the same to process.
Fact: Interchange does not cover just the cost of processing a transaction. Interchange compensates issuers for part of their efforts, costs and risk for making it possible for the consumer to make that transaction in the first place and for the merchant to receive guaranteed payment.
Interchange is calculated as a percentage of the retail price because the implications and risks for the issuer of a $100 purchase are much greater than a $1 purchase. Therefore, the fair approach is to calculate interchange proportionally.
Myth: Interchange fees cover the cost of incentive programs, corporate card programs and marketing.
Fact: Yes, interchange fees do compensate card issuers for the variety of activities they undertake in offering credit cards in the market.
Incentive programs, card programs and marketing are some of those components but so are security and fraud programs, credit risk, promotional programs executed with retailers to drive business to their stores, and many other initiatives that benefit merchants.
Myth: Only the wealthy benefit from credit card reward programs.
Fact: Thirty-seven per cent of Canadians hold credit cards with benefit or reward programs. Those rewards cover a wide range of benefits from travel services to grocery points and are widely used by Canadians.
According to recent research, 80 per cent of credit card holders say credit card rewards programs provide extra value and two thirds (62 per cent) try to collect rewards/points as much as possible.
Myth: The Canadian credit card market is dominated by two companies.
Fact: Approximately 10 per cent of Canadian payments move on the MasterCard system.
There are more than 200 major brand cards in Canada including more than 65 low-interest rate cards.
There are 18 principal issuers and more than 450 issuers in total of MasterCard credit cards in Canada. They compete directly with each other as well as with Visa card issuers, retail card issuers, American Express, Interac, cheques, cash, and pre-authorized debit.
Data released by the Canadian Federation of Independent Business (CFIB) says that 40 per cent of their members accept American Express despite it being a more expensive acceptance option for merchants.
Card issuers compete directly with each other even when they issue the same brand of card and thereby force product innovations, pricing improvements, and other benefits. The credit card market is one of the most vigorously competitive sectors in Canada and consumers and merchants all reap the benefits.
According to recent research, 85 per cent of Canadian credit card holders characterize the market as competitive including 55 per cent who strongly agree. Canadian consumers see and appreciate the vigorous competition.
On the other hand, the Canadian debit market does not have any competition.
Myth: Merchants have no choice. They must accept MasterCard and Visa.
Fact: Merchants always have a choice. Merchants can choose to accept VISA, MasterCard, or American Express or any combination of the three. They can also encourage consumers to use other forms of payment such as cash, debit, cheques, electronic bill payment and unregulated web-based payment providers such as PayPal and Bill Me Later.
Merchants are free to offer discounts to consumers who pay with cash.
Many merchants choose not to accept credit cards. Each merchant must conduct a cost benefit analysis to determine whether the benefits of accepting credit cards outweigh the costs.
Myth: Interchange is regulated everywhere in the world but Canada.
Fact: This is not true. Contrary to the statements of retail lobbyists, interchange rates are not regulated in the United States or the United Kingdom. Australia is the only comparable market where direct regulation of interchange rates has occurred and the initiative has proven unsuccessful in its objectives (see details below.)
Myth: The U.S. has regulated interchange fees.
Fact: The U.S. government has not regulated interchange fees. Legislation has been proposed, but the Department of Justice, the Federal Trade Commission and the Government Accountability Office have all strongly argued against regulation, primarily citing the Australian experience that showed no benefit for consumers and no evidence of reduction in retail prices.
Myth: The U.K. has regulated interchange.
Fact: The UK Office of Fair Trading (OFT) looked at interchange but ultimately abandoned its initiative. At the same time (June 2006), the U.K. Competition Appeal Tribunal (CAT) determined that regulation should not occur.
Myth: A reduction in interchange fees would result in retail price savings for consumers.
Fact: The Retail Council of Canada says that consumers bear the cost of increased interchange rates because merchants must pass those costs on as part of their operational overhead.
Presumably, the RCC is suggesting that its members would reduce retail prices to consumers if interchange rates were lowered? The RCC has not been willing to make this commitment and it has not proven to be the case in the past.
When the Australian government mandated reductions in merchant fees at the request of retailers, merchants did not pass the savings on to consumers. Similarly, when the Canadian dollar reached parity with the US dollar, most Canadian retailers did not pass on their cost savings to consumers. Likewise, retail prices did not decrease when the GST was lowered by two percentage points.
Myth: Regulation of interchange fees in other markets reduced costs to consumers.
Fact: Australia is the only comparable market where direct regulation of interchange rates has occurred and the initiative has proven unsuccessful in its objectives.
When the Australian government mandated reductions in merchant fees at the request of retailers, the reductions were not passed on to consumers as lower prices, and cardholder features were significantly reduced because they could no longer be supported.
The highest priced payment provider in the Australian market – American Express – was not affected by the regulation and therefore saw increased market share.
For reasons like this, the U.S. Department of Justice has recommended against a similar proposal in the United States and noted that the Australian approach hurt consumers.
The U.S. Government Accountability Office’s review of the Australian model found that it caused decline in value for consumers, and no evidence of reduction in retail prices.
Myth: There is no scrutiny of the Canadian credit card marketplace.
Fact: Canadian financial institutions who issue credit cards are regulated under a number of provisions from the Department of Finance. The Financial Consumer Agency of Canada (FCAC) actively monitors financial institution conduct and ensures compliance with federal consumer protection laws and regulations.
Merchant Participation in Electronic Payment Systems
Myth: Merchants can’t obtain competitive transaction processing rates.
Fact: There are seven major acquirers in Canada as well as numerous resellers who market processing services to merchants. They compete directly with one another to get a merchant’s transaction processing business. They compete primarily on transaction processing price.
Myth: Merchants are not able to know the interchange rate that applies to their business.
Fact: Merchants can get their merchant fee rates from their acquirer at any time and the rates are typically provided on their regular statements from their acquirer.
In addition, MasterCard Canada makes the relevant interchange rate information available to merchants via a function on the mastercard.ca web site.
Myth: MasterCard prohibits merchants from allowing a price discount if a customer wants to pay in cash or some other payment means.
Fact: This is not true. MasterCard does not prohibit merchants offering a discount.
MasterCard rules do prohibit merchants charging consumers extra if the transaction is made with a MasterCard card.
Myth: MasterCard establishes the contract with the merchant that defines their obligations related to MasterCard acceptance.
Fact: That contract is drawn up by the merchant’s acquirer. The contract will reflect MasterCard’s operating rules but will also include requirements established by the acquirer.
Myth: MasterCard has been unwilling to speak with merchants regarding credit card processing.
Fact: In fact, MasterCard has had a Merchant Advisory Group (MAG) since 2005. The Retail Council of Canada (RCC) has participated in MAG on multiple occasions. The head of the RCC has addressed the MasterCard Canada Board of Directors.
When the CFIB and RCC issued press releases in September, 2008 citing concerns about interchange, it was MasterCard that immediately contacted the CFIB and RCC to discuss their concerns – not vice versa.
Neither the CFIB nor RCC sought to contact MasterCard. Instead they opted to issue press releases during a federal election.
Myth: Canada is not a priority for MasterCard.
Fact: Canada is a designated operating region for MasterCard with its own local president, strategic plan and investments. MasterCard brought contactless payment to the Canadian market and Canada is now the leading global market for MasterCard PayPass on a per capita basis. MasterCard has also brought a diversity of card issuers into the Canadian market which has meant intense competition that benefits both consumers and merchants.
Myth: The current debit system offers the greatest benefits to consumers and merchants.
Fact: The incumbent Canadian debit system is a privately-held monopoly which has no direct competition in Canada. Therefore, it faces no competitive pressures to innovate, improve service, enhance security and fraud systems, or establish attractive pricing.
Myth: MasterCard’s debit offering will cost merchants more than Interac.
Fact: The pricing for MasterCard’s debit system (called Maestro) is no higher than Interac, yet is operationally the same, is more reliable and provides global reach.
Myth: There are no advantages to MasterCard’s debit system.
Fact: The benefits of switching to a MasterCard’s debit infrastructure are many.
For Canadian consumers, it means that they can finally shop with debit in countries all over the world and with the same confidence they have using MasterCard’s global credit payment system.
Recent research found that more than half of Canadians would be interested in being able to pay with debit outside of Canada, including 30 per cent who are very interested.
For Canadian merchants, the Maestro debit system means they can accept international travelers’ debit cards and MasterCard will provide technological advancements including greater security protections, payment innovations like PayPass™ contactless payment, e-commerce payment capacity, and eventually mobile payments.
MasterCard operates a global debit infrastructure with centralized operations that run 24/7. The system delivers significantly greater scale than Canada’s incumbent debit network. In fact, the MasterCard network has had zero downtime in more than seven years. The system co-processes at three distinct sites for flawless execution and can scale up to 32 times its average peak capacity.
Myth: MasterCard is planning to provide credit and debit features on the same card.
Fact: MasterCard’s debit functionality (called Maestro) works with a cardholder’s existing bank card/debit card. The consumer experience of paying by debit is unchanged.
