Interchange and how it is the next new problem for consumers in Canada
Interchange fees are an obscurity to most Canadians, but the impact on consumers is significent. Interchange is a hot political item in Australia and US and that war might be coming to Canada.
reportonbusiness.com: Credit card perks putting the squeeze on retailers
Banks take in an “interchange” fee, which is a percentage of the purchase, each time a customer uses the card. It covers many of the banks’ costs, including any loyalty or points programs they offer.
For Banks interchange is an easy charge because it is charged to the retailer, inside something call the Merchant Discount Fee, every time you use your credit card. In that way the consumer is not directly hit, and that is why you will see some retailers restrict which credit cards they accept.
However the Report on Business reports here that a new war is heating up in Canada, with the Card companies offerring higher end cards with additional loyalty benefits.
Visa Inc. [V-N]
, the dominant player in Canada, has revised its fee structure in
recent months. It’s trying to encourage growth in specific segments,
such as smaller purchases and bill payments. But it’s also trying to
help banks issue new high-end cards that go head-to-head with American Express Co. [AXP-N] , the leader in issuing cards to wealthy business customers.
….They are geared to people with a family income of $100,000, a personal
income of $60,000, or an annual spend rate of about $30,000. The
company estimates that might be 12 to 14 per cent of Canadians. Many
cardholders are being converted to the new premium cards without having
asked for them, adding to the pressure facing retailers.
The kicker is that those new cards attract higher interchange fees. Witness the Bloor St Diner in Toronto.
Stephen Centner, president of Eatertainment Hospitality Inc., is one of
those feeling the pinch. His company’s Bloor Street Diner in Toronto is
facing a 20-per-cent boost in credit card fees related to Visa
transactions, which would raise his annual payout for all card fees to
about $120,000.
There is only one place that $120K can go and that is higher prices to consumers. This is the interchange problem. The amount merchants are charged is significant.
Mr. Centner says he “sort of freaked out” when his Bloor Street Diner
received a letter notifying it of fee changes. The diner’s merchant
discount rate was rising to 1.86 per cent on each Visa transaction, up
from 1.51 per cent; and 1.56 per cent of each MasterCard transaction,
up from 1.5 per cent. (The merchant discount rate includes interchange
fees).
Why this is big business in Canada.
Canadians held 71.6 million credit cards in 2007, up 9.2 per cent from
the year before, according to the Nilson Report, which tracks the
industry. The number of credit card purchases rose more than 11 per
cent, while the value of goods and services bought jumped nearly 13 per
cent to $261.47-billion (U.S.).
Interchange may be a bad thing for consumers, but merchants may be able to take advantage of increased competition. The higher margin yields associated with Interchange adjustments lead more private (non-bank) financial institutions to compete for merchant service business. In tern, new players enter the market regularly creating a much more competitive landscape for merchants. Today, merchants shopping for new processing relationships might typically entertain bids from 10 different POS (Point of Sale) companies whereas 5 years ago they would likely just walk into their bank and acccept whatever pricing was given to them.
Tom Dolan
June 25, 2008 at 2:48 pm
@Tom .. Thanks for stopping by. You may well be correct. In Australia when they eliminated interchange, competition actually reduced, so when the opposite occurs, i.e. increased interchange, it would be logical to assume greater opportunity for competition,
Colin
June 25, 2008 at 6:33 pm
Where there is no transparency you cannot get a clear preference signal from buyers.
I would propose a very simple solution. Provide a chart at the cash-register indicating the fee/percentage according to the card used. Allow the customer to negotiate the difference with the seller if he uses a lower fee card or cash.
(CC-Merchant contracts typically forbid offering a cash sale at a lower price, although I have paid cash several times in exchange for a lower price).
If I use an ordinary credit card that has no rewards, why should I subsidize those who do?
Alan
June 25, 2008 at 9:26 pm
@Alan … thats an awesome and highly disruptive point! I love it.
Colin
June 26, 2008 at 12:17 am
Hi Colin, as my previous comments refer, disruption is desperately needed to free up a lot of capital that is rotting (literally – given the interest rates paid on deposits v. inflation) in personal deposits at commercial banks.
Let us loose Colin, get us to the start line with CommunityLend. Cheers, Alan.
Alan
June 26, 2008 at 6:15 pm
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