In early September, Minster of Finance Joe Oliver said “the government will work with stake holders to help lower credit card acceptance fees for merchants and also to encourage merchants to reduce prices for consumers” and that “we’re looking at months, not years.”
Our understanding is that the Canadian government is asking Mastercard and Visa to voluntarily reduce average interchange fees by 10-15%, and to simplify the fee structure such that Visa and Mastercard have similar rates. With average interchange rates in Canada currently somewhere around 1.50% to 1.55%, that would bring interchange down to around 1.35% to 1.40%.
The decision will have an immediate impact on Canadians:
1. Less Rewards For Consumers: Canadian credit card issuers will be forced to reduce the earn rate on some of Canada’s most popular credit card. The less interchange banks collect, the less money banks have to fund a rich rewards program whether it be cash back, points or miles. If the banks were collecting an average interchange of 1.5%, and gave 1% back to the consumer in the form of cash back, they will have to reduce the value proposition by the same 10-15 percentage points to maintain their margins.
Some of Canada’s biggest credit card rewards programs, such as Aeroplan, Air Miles, Avion, Aventura and others will likely have to reduce the level of rewards offered to consumers. Cash back credit cards, offering rebates of anywhere from .5% to 1.25% will also have to reduce their value.
The one exception may be American Express. We’re not sure if they’ve been instructed to also reduce their interchange. If not, they’ll be able to maintain the value of their rewards programs, and may come out the big winners – along with some retailers.
2. More Loyalty To Retailers, Less to Banks: By extracting interchange at the credit card issuing level, Visa and MasterCard essentially took money out of the pockets of retailers and into the hands of banks. As a result, banks funded their own proprietary rewards credit cards with the retailer’s money, thus the sudden rise of Avion, Aventura, BMO Rewards, Scotia Momentum and TD First Class. That trend may reverse itself slightly. With more margin at the retail level, and less at the bank level, retailers will be able to fund their own loyalty and/or credit card programs more effectively in one of two ways:
1. Retailers with strong loyalty programs such as Shoppers Optimum, Scene, Petro-Points, Canadian Tire Rewards/Money and others will be able to make their loyalty programs even richer, because of increase retail margins.
2. Retailers with their own credit cards such as Canadian Tire, Loblaw’s, Wal-Mart and retailers with credit card bank partners such as Sears, Hudson Bay, Shoppers and Costco will be able to react differently than the banks themselves will. While interchange fees which currently fund retails credit card rewards will decline, their retail margin will improve, because of lower interchange fees on their own credit cards used in store and all other Mastercard and Visa cards used in store. As a result, they will have the opportunity to subsidize the value proposition of their own credit cards, from their retail margins, as opposed to their issuing margins.
3. Less Credit Card Usage: With consumers receiving less rewards from any given credit card, it is possible we’ll see less credit card usage. While there is certainly an element of “what’s the alternative”, the average consumer may no longer be enticed by have to wait even longer to earn enough points for a valuable reward like a free flight. While we don’t think consumers will walk away from plastic, Canadians specifically, may return to debit, where credit is not needed.
One thing is for certain, when interchange is reduced, Canadians will see an immediate impact on some of their most valued credit card rewards program. What is not so certain, is how many merchants will share their savings on interchange with consumers. We suspect the larger merchants, that already have robust loyalty programs and credit card programs of their own, will have the most to gain, while smaller merchants will lose out even further on the loyalty game.