Finance & Taxation

Details of Visa’s Interchange Rate Revisions

Summary
In order to meet its November 4, 2014 commitment to reduce its average interchange rate to 1.50%, Visa Canada is reducing rates on all consumer credit cards in all merchant categories. The new rates will come into effect on April 18, 2015 and can be expected to be in effect for a period of five years, absent further reductions.

Reductions are fairly minor in categories already enjoying preferred rates, i.e., Visa’s Tier 1, Tier 2, Grocery and Gas categories. These reductions range from 3 basis points (bps) to 5bps (representing a reduction of less than 3% from current rates). The largest reductions are made to the Electronic (i.e., card-present) and Standard (i.e., card not present) categories, with reductions of between 12bps and 20bps (7% off current rate levels). Merchants benefiting from these changes would have net Visa sales under $850 million.

While Visa has also announced the April 18, 2015 introduction of reduced rates for corporate and purchasing cards in certain circumstances (i.e., enhanced data and large-ticket purchases), these were, in fact, previously announced changes, first communicated on July 14, 2014.

Background
On November 4, 2014, agreements were announced by each of Visa and MasterCard to reduce their respective interchange rates on consumer credit cards from current levels to an average of 1.50%. These reductions will initially be for a period of five years, commencing April 2015.

For Visa, this means a 7% reduction in its current average rate (down from 1.61%). For MasterCard, this means a 14% reduction in its current average rate (down from 1.74%).

The government has announced these two agreements, taken together, as being a 10% reduction, whereas RCC calculates its overall impact as a 9.3% reduction from current levels. Over five years, merchant savings will amount to approximately $1 billion on Visa and a further $1 billion on MasterCard.

New Rates
On April 18, 2015, the following rate reductions will take effect.

Performance Tier 1 (Visa spend >$2 billion)
ClassicInfiniteInfinite Privilege
Current to April 17, 2015Tier 1 >$2 billion Visa spend1.40%1.60%2.00%
18-Apr-15Tier 1 >$2 billion Visa spend1.37%1.56%1.95%
Reduction in basis points3bps4bps5bps
Reduction % of current rate2.14%2.50%2.50%

 

Performance Tier 2 (Visa spend >$850 million)
ClassicInfiniteInfinite Privilege
Current to April 17, 2015Tier 1 >$850 million Visa spend1.45%1.65%2.00%
18-Apr-15Tier 1 >$850 million Visa spend1.41%1.61%1.95%
Reduction in basis points4bps4bps5bps
Reduction % of current rate2.76%2.42%2.50%

 

Consumer Electronic (a.k.a. card-present transactions)
ClassicInfiniteInfinite Privilege
Current to April 17, 2015Consumer Electronic1.54%1.74%2.25%
18-Apr-15Consumer Electronic1.42%1.61%2.08%
Reduction in basis points12bps13bps17bps
Reduction % of current rate7.79%7.47%7.56%

 

Consumer Standard (a.k.a. card not present transactions, including online)
ClassicInfiniteInfinite Privilege
Current to April 17, 2015Consumer Standard1.65%1.85%2.65%
18-Apr-15Consumer Standard1.52%1.71%2.45%
Reduction in basis points13bps14bps20bps
Reduction % of current rate7.88%7.57%7.56%

 

New Rates for Supermarket and Petroleum
Rates have been lowered for grocers and petroleum merchants. The rate reductions are comparable to those in Visa’s Tier 1 and Tier 2 categories.

Grocery
ClassicInfiniteInfinite Privilege
Current to April 17, 2015Industry Program Grocery1.36%1.56%2.00%
18-Apr-15Industry Program Grocery1.33%1.52%1.95%
Reduction in basis points3bps4bps5bps
Reduction % of current rate2.21%2.56%7.55%

 

Gas
ClassicInfiniteInfinite Privilege
Current to April 17, 2015Industry Program Gas1.21%1.41%2.00%
18-Apr-15Industry Program Gas1.18%1.37%1.95%
Reduction in basis points3bps4bps5bps
Reduction % of current rate2.48%2.56%2.50%

New rates have also been introduced for Recurring Payments (Classic 1.37%, Infinite 1.56% and Infinite Privilege 1.95%) and for Emerging Segments, e.g., charities, the MUSH sector and utility payments (Classic 0.98%, Infinite 1.17% and Infinite Privilege 1.95%).

Other Issues
An independent auditor will ensure that each network complies with the new 1.5% benchmark rate. The government has made it clear that non-compliance by the networks will likely lead to regulation.

The government will take the steps necessary to ensure that acquirers pass on these fee reductions, whether by mandating that network rules must require processors to pass on the fee reductions and/or allowing merchants to cancel acquirer contracts without penalty where said acquirer does not pass on the full fee reduction.

For further detail, please contact Karl Littler at Retail Council of Canada:
Office: 416-467-3783 | Mobile:416-906-0040 | Email: klittler@retailcouncil.org

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