Why You Should Root For Visa In It’s Battle With Walmart Canada

Visa Walmart Credit Card Interchange feesIn 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.

Conclusion

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.

4 comments

  1. The main flaw in this logic is that MasterCard also has plenty of rewards cards that are apparently supported by a net average lower interchange rate than Visa.

    • Hi Rob,

      Thanks for your comment!

      Not sure we agree. We believe that both MasterCard and Visa are targeting the same average interchange rate, across their national portfolio, of 1.5%. They each get their in different ways. For example, MasterCard’s deal with Costco is rumored to charge interchange rates of 70 to 80 basis points. MasterCard can then use the high purchase volume from the Costco deal to lower its overall average portfolio interchange rate to 1.5%, since it charges a vastly higher rate to smaller merchants than Visa. It was a masterstroke from MasterCard, because they didn’t have to lower their interchange fees anywhere else in the country. They merely added volume (Costco used to be 100% Amex) at a lower interchange rate, to lower the overall portfolio average to 1.5%.

      Moreover, it should not be assumed that MasterCard has agreed to lowering its interchange fees to the rate Walmart is demanding from Visa. Walmart can’t afford to ban both networks from its stores at the same time. So it may first be tackling Visa, then MasterCard. Moreover, Walmart may be “in-contract” with MasterCard, especially since it signed its co-branded Walmart MasterCard deal not so long ago.

      The numbers are the numbers, no interchange, no rewards. Look at any credit card P&L and it’s clear as day.

      Hope that helps clarify our position. We’d be more than happy to address any additional questions, because it’s very important everyone understands the implication of the decision.

      GreedyRates Staff

      • It does seem counter intuitive to root for the credit card companies as they are so closely associated with banks and personal debt problems. With the information provided by this site, one can see that there is a lot of value in both rewards and services that debit cards don’t provide. I always say that credit cards are great – as long as you don’t use them for credit. I am also more comfortable with the idea that any fraudulent purchases can be dealt with while I still have my money in the bank as opposed to debit cards where I would have to fight to get my money back.

        • Hi unfortunately, no matter the credit card issuer, if you’re late on your payments they will block your card from further transactions until you make the minimum payment and you’re account become current.

          While it is frustrating, the banks can’t afford to extend additional credit once someone has demonstrated a possible inability to repay. That said once you’ve made your payment hopefully your account was reactivated promptly.

          GreedyRates Staff

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