New Agreement Caps Interchange Fees for Some Small Businesses in Canada
As we’ve been saying since we started in this industry, Canadian businesses are paying way too much when it comes to interchange fees.
But an agreement between the feds, Visa, and Mastercard, which just came into effect last week, may be able to provide some relief, at least for some small businesses.
Truth be told, the Canadian government has been talking about regulating interchange fees for years now, but until recently, it didn’t seem like they were going to do anything about it.
We’ve been covering this specific story for about two years now, but our current federal government started talking about it way back in 2019, when the Liberals began leveraging this issue as part of their election campaign.
Back in 2022, we published our first article on this, which asked, Is the Canadian Government Really Going to Regulate Interchange Fees?
At the time, things were still very uncertain, and whether the government planned to actually bring in regulations was anyone’s guess.
But if you’d like some background on this story, that article is a good place to start.
Then, last year, after the government announced it had reached an agreement with Visa and Mastercard, we published a second piece on this story, Feds Finally Reach Deal With Visa and Mastercard to Lower Interchange Fees for Small Businesses in Canada.
This article goes into great detail on the ongoing fight to lower interchange fees in Canada and sums up the terms of the agreement, so if you want to know more about how this story has been unfolding, you should check it out, as well.
In any case, now that this agreement has come into effect, we want to make sure you’re aware of what’s happening and offer our take on it, as well.
So, if you want to learn more about these changes to interchange fees in Canada and get our honest opinion on what this actually means for your business, then you’re going to want to keep reading.
How Does This Agreement Affect Interchange Fees In Canada?
Earlier this month, the government published a press release outlining what it’s supposedly doing to help small businesses in Canada, including capping interchange fees for eligible businesses.
“The federal government is making life easier for locally owned businesses by introducing reduced credit card transaction fees,” said Minister of Public Services and Procurement Canada, Jean-Yves Duclos.
But how exactly is this going to work?
Well, according to the feds, as a result of these changes, over 90% of small- and medium-sized Canadian businesses will see their interchange fees slashed by up to 27%, and this is projected to save small businesses about $1 billion over the next five years.
With that in mind, here’s what Visa and Mastercard will be doing for eligible businesses as a result of this agreement:
Reducing domestic consumer credit interchange fees for in-store transactions to an annual weighted average interchange rate of 0.95%
Lowering domestic consumer credit interchange fees for online transactions by 10 basis points, offering reductions of up to 7%
Providing free access to “cybersecurity and online fraud resources” to help small businesses sell more online, while preventing fraud and chargebacks
However, only businesses and non-profits with annual Visa sales of less than $300,000 will qualify for lower interchange rates from Visa, and only those with annual Mastercard sales of less than $175,000 will qualify for lower rates from Mastercard.
It’s also important to point out that organizations will have to qualify with each credit card network individually.
The government even provided an example of how this could help, saying that if a business processes $300,000 in credit card payments, it could save $1,080 in interchange fees.
But is this an accurate representation of the interchange fees Canadian small businesses pay?
And is this agreement as good as the government’s making it out to be?
Let’s take a closer look and find out.
Our Take on These Changes to Interchange Fees in Canada
As we said in our last article on this, it’s great to know that small businesses in Canada may end up seeing some relief from the insanely high interchange fees they’ve been paying.
It would have been nice to see these fees reduced even further, but going from an average interchange rate of 1.4% down to 0.95% is nothing to scoff at either.
However, when it comes to this agreement, and this latest announcement, there’s a lot to criticize.
For one thing, the government’s being very disingenuous with its example of the interchange fees a business would supposedly pay.
In its latest press release, the government claims that if a business in Canada processes $300,000 in credit card payments, they’ll pay about $4,000 in interchange fees.
But we did the math on this, and they are really lowballing it.
Because in order to pay only $4,000 in fees on $300,000, the cards you’re processing would have to have a rate of no more than 1.33%, which is pretty much unheard of.
To put things in perspective, if you were to calculate the interchange fees paid on that same amount through Square, which charges rates of at least 2.65%, and is the processor of choice for many small businesses in Canada, it would come to $7,950, which is nearly twice as much as the government’s estimate.
What’s more, even though the government has published several press releases on this agreement, we’re still left with many unanswered questions.
For instance, while the government keeps talking about how businesses will have to qualify with each card network, there’s been no indication of how they can do that, either from the feds or the credit card companies themselves.
So, even as these new changes have come into effect, it’s yet to be seen how businesses will be able to qualify.
Moreover, neither the government nor the credit card companies have given any indication as to where businesses can access the free “cybersecurity and online fraud resources” they’ve committed to provide.
Furthermore, as we’ve learned over the years, many small businesses in Canada are with payment processors outside of Canada, but because this agreement was made solely between the Canadian government, Visa, and Mastercard, there’s no reason to think that these changes will apply to foreign payment processors.
As we outlined above, these reductions are only for “domestic consumer credit interchange fees”, so we can only assume that this applies to Canadian payment processors only.
As a result, many small businesses in Canada will never see these rate reductions, not least because this agreement doesn’t apply to their processors.
Also, in a press release on this agreement published last year, the government said it expects “that payment processors will pass these reductions on to small businesses.”
But if you know anything about our industry, you’d know that many payment processors are notorious for refusing to pass interchange rate reductions on to their customers, instead choosing to obscure these savings by padding people’s bills with miscellaneous fees.
Moreover, the payment processors and the banks are not part of this agreement with the government, so they can continue to do whatever they want, and they will.
Sadly, all of this shows just how out of touch our federal government is with the frustrations of small business owners in this country.
And as far as we’re concerned, this agreement is much too convoluted, it leaves way too many questions unanswered, and it doesn’t go nearly far enough, as it’s not applicable to so many small businesses in Canada.
Unfortunately, there’s nothing we can do to stop the government from being so unclear about this.
But we will continue to cover this ongoing story, making you aware of any new updates, and breaking it down as best we can to help you gain greater clarity on your payment processing.
Are you tired of paying so much for payment processing? Schedule a Rate Reduction Review to see how much you can save with Lucid Payments, or contact us today to learn more.