Backgrounder: New Voluntary Commitments From Payment Card Networks

In November 2014, Visa and Mastercard separately committed to voluntarily reduce their interchange fees, which businesses are charged for the use of their cards. American Express, which operates a unique business model with fees other than interchange fees, informally committed to maintaining its current business model.

At the time, Visa and Mastercard separately agreed to reduce their domestic consumer interchange fees to an average annual effective rate of 1.50 per cent in each of the next five years. Those voluntary commitments took effect in April 2015 and have lowered card fees paid by Canadian businesses by approximately $2 billion since 2015.

To ensure that Visa and Mastercard were living up to these commitments, and to ensure that Canadian businesses and consumers had access to a credit card market that was fair and transparent, in September 2016 the Government undertook a review of the effects of Visa’s and Mastercard’s voluntary agreements from 2014.

Following this review, the Minister of Finance established three guiding objectives for greater fairness and transparency in the payment card market:

  1. a reduction in the overall level of interchange rates charged to Canadian businesses;
  2. a significant narrowing of the range of interchange rates (the gap between the lowest and highest rates charged to businesses); and  
  3. greater transparency on the range of interchange rates.

These objectives are aimed at levelling the playing field, so that small and medium-sized businesses are no longer at a significant competitive disadvantage to larger businesses, which have greater bargaining power when it comes to negotiating lower rates.

In August 2018, the Government confirmed that these objectives will be met through new, separate and voluntary commitments made by three payment card networks, which will take effect when the original commitments end in 2020.  

These commitments from Visa and Mastercard are expected to reduce average interchange rates for businesses by up to 15 per cent from their highest levels in 2014, supporting a more level playing field for businesses of all sizes, while helping small and medium-sized enterprises be more competitive.

American Express made a separate voluntary commitment that will support the Government’s objectives of greater fairness and transparency. This commitment recognizes the fact that American Express operates a unique business model with fees other than interchange fees.

Interchange fees are the net portion of credit card acceptance fees set by the payment card networks, that are received by the institution that issued the credit card, for purchase volume processed by a payment card network. Interchange fees are passed on to businesses by payment card acquirers and ultimately to consumers in the form of higher prices.

It is expected that Canadian consumers will also benefit from the new voluntary commitments. With lower costs for accepting credit cards as a form of payment, businesses will be better able to keep prices lower for customers.

Estimated Savings for Small and Medium-Sized Businesses

The reduction in interchange fees is expected to save small and medium-sized businesses in Canada $250 million per year, based on credit card sales of roughly $250 billion per year.

For a medium-sized business with credit sales of $5 million per year, a 10 basis point reduction in interchange fees—equivalent to the reduction announced today—could allow for savings of up to $25,000 over five years.

For smaller businesses with credit sales of $1 million per year, a 15 basis point reduction in interchange fees could allow for savings of up to $7,500 over five years. Due to the narrowing in the range of interchange fees, it is expected that small businesses will receive a greater reduction in interchange fees than large businesses, under the new agreements.

Timelines and Aftercare

The commitments made by the three payment card networks will take effect on May 1, 2020, for a period of five years.

In addition to the benefits provided by the new voluntary commitments, businesses will continue to receive protections offered by the Code of Conduct for the Credit and Debit Card Industry in Canada which has been adopted by the three payment card networks. The Code protects merchants from unfair business practices in the credit and debit card market and against increasing acceptance costs. Any merchants with concerns about implementation of the Code may contact the Financial Consumer Agency of Canada at: 1-866-461-FCAC (3222).