Walmart Canada announced that if Visa does not lower its interchange rates, it will no longer accept Visa credit cards in 16 of its stores in Winnipeg starting October 24th, 2016. Walmart has already stopped accepting Visa credit cards in 3 of its stores in Thunder Bay, Ontario.
A spokesman for Walmart said “unfortunately Visa has not been willing to provide a reasonable rate to continue accepting their cards. We believe credit-card fees should be lower for everyone, whether they’re a large retailer, small business or charity.”
In response to regulatory pressures in Canada, both Visa and MasterCard voluntarily agreed to reduce their average credit card acceptance fees to 1.5% back in April of 2015. However, many retailers, large and small alike, continue to complain of the high rates.
Walmart has been battling for lower credit card acceptance rates in Canada and the United States for years. In the U.S. the acrimonious relationship has spilled over to the courts on multiple occasions. In Canada, Walmart and Visa are playing a game of chicken, to see who blinks first, as Walmart tries to force Visa to lower its “interchange” or credit card acceptance rates.
Many countries have legislated lower interchange rates, with the European Union capping the fee at .3% for Visa and MasterCard credit card purchases. In Canada, while the average rate is 1.5%, individual cards can be north of 2%.
Who Benefits From High Credit Card Acceptance Rates?
What’s important to note, is that not all of the 120 basis point delta (1.5%-.3%), between Canada’s average interchange and the European Union’s interchange rate falls to the credit card issuers bottom line. In fact, the largest beneficiaries of the higher interchange are consumers.
When you consider that most no fee credit cards offer a 1% cashback or rewards rate, that’s the equivalent of 100 basis points which the bank has to fund directly to the consumer. In addition, the bank has the cost of rewards administration. For fee based rewards cards, rewards are as high as 2% of earnings on all spend.
What Happens If Interchange Rates Drop?
If Canadian merchants get their wish, and interchange rates drop, credit card issuers will no longer be able to support the rich credit card reward programs Canadians have come to love.
There is simply no way banks can afford to give away 1%-2% of purchases, if they’re only collecting .3% from the merchants.
Yes, banks collect interest and fee income, but those revenues also have to pay for credit card operating expenses such as charge-off’s, fraud losses, servicing (call centre, collections), statements, plastics, processing, insurance, extended warranty, marketing, etc…
Many banks have already started paying out more rewards per dollar spent, than they collect in interchange per dollar spent. They rely on income from interest and fees to pay the difference. If interchange drops, they will have no choice but to reduce the value of rewards offered to cardholders.
In fact, Canada’s credit card rewards market has gotten extremely competitive in recent years, demonstrating that credit card issuers really are funneling much of the interchange back into rewards. many banks have recently increased their cash back earn rates from .5% to 1%, doubling rewards rates – the money has to come from somewhere.
You hear many merchants advocating debit, arguing if Interac only costs $.05 to $.10 a transaction, how can credit cards cost up to 2% ($2 on a $100 transaction). The answer is simple, the consumer is paying for debit through their checking account fees, debit offers no rewards, perks, or insurance and is much cheaper to run than a credit issuing product. Remember, on that same transaction, the cardholder may be getting 2% herself.
For example the BMO MasterCard World Elite offers consumers 2% rewards on all transactions. The no-fee Rogers Platinum MasterCard offers 1.75% cashback and the no-fee Tangerine cashback credit card, offers 2% cash back in 2 merchant categories of your choice with 1% everywhere else. How can they afford those rewards without interchange rates of 1.5% to 2%? They can’t.
The cards that will be most dramatically impacted will be the high earning travel rewards cards such as the TD Aeroplan Infinite Visa, WestJet World Elite MasterCard, and RBC Avion cards. Customers of those cards tend to pay their balances down at a higher rate than some of the no fee mass market cards. As a result, banks earn less interest revenue, and rely more on the “interchange” (credit card acceptance fees in question) fees charges to merchants to fund the rich rewards rates or premium travel cards.
What This Isn’t About
This fight is not about benefiting the consumer. As we demonstrated above, the consumer is already benefiting from high interchange rates, in the form of higher rewards.
This fight is about Walmart and merchants wanting the 1.2% for themselves, to do with it what they want. They can either pocket the money, pass on the savings to consumers in the form of lower prices, or use the savings to fund their own loyalty programs.
Lessons From Around The World
If you want proof of what’s going to happen if interchange rates drop, just look at Europe. France has no credit card rewards programs to speak of. But is France a consumer friendly country? No. It’s ruled by
In many ways Visa and MasterCard have done Canadians a favour by using their scale to squeeze money out of the retailers to fund our rewards programs no matter which merchant we visit. Without interchange, that all goes away – each merchant will get to decide how much of their savings they give back to the consumer in the form of lower prices, and how much they keep for themselves.