In its ongoing feud with VISA over credit card fees, Walmart Canada stopped accepting Visa credit cards in its 16 stores in Manitoba, as of October 24th. Walmart continues to threaten to ban Visa from the balance of its 400 Canadian stores if Visa doesn’t lower its interchange fees.
The question is whether Canadians should be rooting for Walmart or Visa. If Canadians love their rewards credit cards, they should be vigorously supporting Visa.
What Canadian consumers need to understand, is that interchange fees are the source of revenue that fund their rewards programs. No interchange fees, no rewards. Retailers are looking to reduce interchange fees to enhance their own profits, not to benefit the consumer – the consumer already benefits.
1. Visa fees are necessary to fund credit card rewards programs
The fee Visa charges merchants is called interchange. 100% of the interchange fees from any given transaction go to the issuing credit card company. Credit card companies then use the revenues collected from interchange fees to pay for operations, and more specifically, for credit card rewards programs.
Currently, Visa and MasterCard have agreed to charge an average interchange fee of 1.5% to all merchants. As a result, some cards for some merchants might cost retailers 2%, others 1.25% per transaction. Your credit card issuer, then uses its interchange revenue to fund your rewards rate of 1%-2%. Some banks even lose money on the difference between how much they collect in interchange revenues, and how much they give back to cardholders in rewards. They make up their profit on fees and interest charges.
If interchange revenues decline, credit card companies will lose the source of funding for rewards programs. As a result, consumers will lose out on their cash back, miles and points programs.
2. Lowering fees will mean less, or no, credit card rewards
Luckily, Canadians don’t have to guess the results of lower interchange. On Dec 9, 2015 the European Union forced a mandatory drop in interchange fees to .3% for Visa and MasterCard in Europe.
The results were stark and immediate. In April, 2015 CapitalOne U.K. cancelled ALL of its rewards cards, saying EU rules meant they were “no longer sustainable.” Royal Bank of Scotland and NatWest ended their “Your Points” scheme. Tesco cut its reward rate by half and in February of 2016 M&S Bank cut its reward program by half as well.
We would forecast a similar reaction by Canadian credit card issuers to a dramatic drop in interchange fees.
3. No evidence a drop in Visa fees will result in a drop in retail prices
Currently, Canadians consumers are the one’s benefiting from interchange fees. If interchange fees are dropped, the only way consumers can be made whole is if they see a similar drop in retail prices. However, neither Walmart, nor any other merchants, have guaranteed how much of their interchange savings would be passed on to consumers versus shareholders.
As a result, why should Canadian consumers, the vast majority of whom use some type of cash back, rewards or travel credit card, be happy sharing their current rewards with Walmart? What do they gain from it?
The answer is Canadian cardholders would literally gain nothing from a reduction in interchange, since it’s merely a shift of the same bundle of income from their pockets, to those of the retailer. They could ONLY lose.
4. Walmart’s battle may force regulators to work for smaller merchants
A reduction in interchange rates at Walmart alone may not be large enough to force Canadian credit card issuers to drop the value of their rewards rates in the short term. However, if Walmart gets a “special” interchange rate reduction, Loblaw, IGA and Metro will all be asking for the same, since they match Walmart’s size in Canada.
Moreover, if Walmart is victorious, Canadian regulators will likely be under intense pressure to act on behalf of smaller merchants, represented by the CFIB, who don’t have the size to rumble with the likes of Visa and Mastercard. Merchants will point to the EU and Australia, and ask why our government can’t stand up to Visa and Mastercard in similar fashion.
What needs to be understood first and foremost, is that the battle over interchange fees is not about creating value for Canadian consumers. Most, if not all, current interchange fees extracted from merchants is passed back to consumers in the form of cash back, miles and points.
The battle over interchange fees is about merchant control and margin enhancement. The Walmart’s of the world don’t want the banks playing with their 1.5%. They want to be the ones who determine how much to give back to the consumer, and how much to keep for themselves.
Canadian consumers should be perfectly happy with the job Visa and MasterCard are doing extracting 1.5%+- from retailers and putting it in their pockets. It’s a super efficient redistribution of income that has benefited Canadian cardholder extremely effectively. There’s no upside in giving it back to the retailer.