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Merchants with debit card processing in Canada will be stuck
waiting to see if their own regulations will follow the lead set by the U.S.
Congress and Federal Reserve Bank on Wednesday, June 29. The Fed agreed to cap
fees that U.S. banks can charge retailers for each debit card payment they
accept, establishing a maximum fee of 21 cents for all U.S. banks with at least
$10 billion in assets. This is less than half of the average current fee of 44
cents, and the new cap will go into effect on October 1, 2011. Though credit
cards were also considered no announcement seems pending for a similar credit
card processing system fee cap.
The regulation, initially proposed as an amendment to legislation signed in the
United States last year, is a big deal for Canada because it targets the two
biggest companies, Visa and Mastercard, and because Canada and other countries
often take cues from the United States on regulations of this nature. The
proposal originally suggested a cap in the range of 7 to 12 cents, which banks
quickly responded would cost the industry $13 billion, and not provide them with
enough revenue per transaction to cover their fraud protection measures.
The debate in the United States heated up with experts on both sides contending
that they represented consumers’ best interests. The obvious arguments made by
proponents of the cap are that high fees hurt businesses, especially small ones,
and as a result, consumers. Many small businesses have resorted to either
raising their prices across the board or offering customers incentives if they
pay in cash as a way to stem the flow of blood that began when credit and debit
card companies started increasing their rates on everything over the past few
years. For many small businesses, the extra costs of accepting non-cash payments
have literally been crippling, as they can’t refuse to accept these payments for
fear of losing business to bigger stores and those who did offer it, but they
can’t really afford the increased rates, nor their customers the higher prices
needed to maintain a survivable margin.
On the other hand, banks big and small argued that capping debit card processing
fees would create all kinds of new market pressures that would slow down the
economy and hurt consumers as a result. Big banks argued that they would have to
decrease the quality of their services somewhere or find other ways to generate
more revenue either from customers or merchants. Many have already begun to
significantly curtail their rewards programs as a first step. Small banks
worried that the lower profit margins from debit card processing would lead the
other banks to squeeze these small banks out of the market in an effort to
capture a larger market share and stay profitable in that way. And in each of
these cases, they claimed, fewer services and fewer providers would ultimately
cost the consumer more than anyone else.
Yet merchants and customer groups in the United States cheered the Fed’s debit
card processing decision. It remains to be seen how regulators in Canada will
respond, and how long they will wait to see the effects of this cap on overall
economic activity before making their own decision.
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