Canadian Pizza Magazine

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Who profits in a house of cards?


January 13, 2010
By Andrew Silver

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Visa and MasterCard have rolled out their new debit products in the Canadian market and now pizzerias are facing a high-stakes game of rising transaction fees and uncertain regulations.

Visa and MasterCard have rolled out their new debit products in the Canadian market and now pizzerias are facing a high-stakes game of rising transaction fees and uncertain regulations.

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“They think it’s the wild, wild west, but there is a new sheriff in town,” says Diane Brisebois, Retail Council of Canada (RCC) president and CEO, of Visa and MasterCard. 

A conflict has been building for months between those set on revolutionizing Canada’s debit system and those determined to maintain the current structure. On one side stands global giants Visa and MasterCard, armed with their new debit cards, while various interest groups such as the RCC and the Canadian Restaurant and Foodservices Association (CRFA) look to protect the merchants. The government has intervened by introducing a voluntary code of conduct for debit and credit cards, though the impact of a voluntary code will remain to be seen and was not finalized at the time of publication.

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The players
Depending on how the cards fall over the next year, retailers could see significant price increases for debit card transactions. Since 1984, the Interac Association has been the sole organization running the debit payment network in Canada. It is a non-profit company with the mandate of maintaining low, flat-fee transaction costs. The fee structure is negotiated between merchants and their service provider but most merchants pay a flat fee of seven to 10 cents per transaction.

MasterCard claims that its Maestro debit card will come with a flat fee that will be less expensive for merchants than all other debit options in Canada. However, under current regulations it has the right to increase fees as it pleases.

“All we have to do is look at what’s happened in other countries to see that they will increase fees,” says Brisebois.

Visa’s debit card is a completely different beast. Unlike Interac and MasterCard, Visa intends to charge a transaction fee based on a percentage of the purchase price. The average cost is said to be 0.25 per cent plus 15 cents per transaction. This means that a $25 pizza order will cost the merchant 21 cents, whereas it would generally cost between seven and 10 cents under the current structure of Interac. 

The major Canadian banks that will be issuing these cards also play a role in the equation, as do the payment processing service providers. It is through these institutions that Visa and MasterCard will market their new products.

In addition to concerns over increased costs to retailers, lobbyists have called for better transparency with respect to the contracts between merchants and service providers. Store operators need to be aware of the costs associated with accepting debit and be free to choose which payment options they accept.

Two of a kind?
“Interac and Visa are complementary and work well together,” says Sue Whitney, head of debit for Visa Canada. “They can coexist on the card as two flowers of debit.”

Whitney says that Visa’s product will offer consumers and merchants important benefits that are not currently available via Interac debit cards. For consumers, Visa debit boasts “additional layers of security with a centralized fraud detection network that sits at the centre of Visa,” says Whitney.

What’s more, the zero-liability feature means that disputed transactions are handled in a similar manner to disputed credit card transactions, with the consumer refunded right away. Further, consumers have the luxury of using their Visa debit cards in 170 countries with the same ease as they do in Canada.

Whitney suggests that Visa’s product creates sales opportunities through different channels for merchants, as customers can use Visa debit online and over the phone.

“Merchants are pretty savvy. Why wouldn’t they want to introduce competition to the debit space?” says Whitney.

For small business operators, the answer seems fairly straightforward: extra cost. When it comes to pricing, Visa effectively passes on the responsibility, arguing that there is a contract that exists between the bank or service provider and the merchant that is “outside the scope of Visa.”

According to Brisebois, it is clearly Visa that dictates, and benefits from, charging a percentage-based fee.

“Say a pizzeria makes a large sale for $60. Using Visa’s system it would cost the merchant 30 cents. Using Interac it would cost on average 7 cents. That’s a 400 per cent increase for the same transaction,” says Brisebois.

For opponents of Visa debit, it doesn’t make any sense to charge a percentage-based fee when there is no risk and no credit involved.

“Debit is equivalent to cash,” says Garth Whyte, president and CEO of the CRFA.

The other major difference between Visa and MasterCard debit cards and traditional Interac cards has to do with the contracts merchants sign. For the RCC and the CRFA, any new debit payment system that emerges needs to provide clarity and fairness to merchants.

“We want a system that is more reasonable, predictable, and transparent,” says Whyte. Pizzeria operators need to have a clear understanding of the terms of the contracts they sign, especially when it comes to fee increases.

“The past year and a half has been a period of tough economic times, yet Visa and MasterCard have increased fees at least four times,” says Brisebois. “They’ve been increasing fees like drunken sailors.”

Currently, there is no government regulation that prevents credit card companies from increasing their fees without providing proper notice to their customers (the merchants).

In addition to being subjected to sporadic fee increases, merchants are also left in the dark when it comes to understanding how the new debit point of sale (POS) systems will work. For instance, customers using Visa debit will have the option to use the Interac network, but may have to opt out of the Visa network at the POS machine. Many newer devices use the Visa network as a default. There is a greater burden on the merchant, as well as the consumer, to have a better understanding of the terms and conditions of the new debit system.

Voluntary code of conduct: the winning hand?
The federal government has announced a voluntary code of conduct for credit and debit cards in Canada that has been met with warm reception from the RCC and CRFA. These proponents praise the code for calling for more transparency and flexibility for merchants. Most importantly, it represents something that the credit card companies can be held accountable to.

“This is just a first step. It’s the recognition by the government that there is an issue and a problem,” says Whyte. “The proof is in the pudding. We will be watching very closely.”

The two obvious problems with the code are that it is voluntary – meaning that the credit card companies can choose to simply ignore it – and that it does not call for a flat fee standard to be put in place. The federal government has addressed the first point, having said that it takes the code seriously. But, ultimately, it has taken the line that it doesn’t want to have to regulate the industry. The flat fee is the next big issue that those on the merchants’ side of the battle will press for.

“The flat fee is the next major issue for us to address. We would like to see a flat, fair fee. The larger the pizza, the larger the fee? That doesn’t make sense,” argues Whyte.

Recently, Interac filed to become a for-profit company on the premise that it will not be able to compete with Visa and MasterCard unless the company restructures.

Supporters of Visa and MasterCard debit argue that Canada’s debit market lags behind the rest of the world. They say we use an old system with outdated technology that isn’t any good for consumers. Canada is moving towards a virtually cashless economy with an appetite for debit. We are the number two debit market in the world (behind Sweden), which is why it stands to reason that Visa and MasterCard’s new debit products have an excellent chance of success with Canadian consumers. Merchants need to know how to protect their businesses now more than ever.

Know how to play the game
The CRFA has published a list of important points on its website that merchants should address when signing or amending a payment agreement.

First, merchants should insist on a flat fee. Service providers may want to amend existing agreements to allow for debit fees based on a transaction percentage. Ensure that credit card companies and their processors request written permission before amending an agreement.

Second, restaurant operators have choice in which debit or credit cards they want to accept. This choice should not be forced and merchants should demand all the information regarding the benefits and costs of new debit cards in writing before signing or amending any processing agreement.

Third, merchants must be aware that some new POS systems have priority routing and can be automatically programmed to use the Visa or MasterCard networks first. If POS systems are using priority routing, operators should insist that the processing equipment enables them to switch the order in which payment network options are presented to the customer.

Finally, the CRFA suggests that, since debit is equivalent to cash, charge-back and funding rules should not be the same as for credit. Merchants should resist credit card companies and their processors on charge-back and funding rules for debit that are the same for credit.

The rules of the debit game in Canada are clearly changing. All parties involved must be ready to play a part. For restaurant operators, this means staying on top of the developments in the payment world and passing on their knowledge to their customers.

Only by being diligent in understanding Canada’s changing debit market can pizzerias hope to keep rising rates in check, for higher fees will ultimately have to be passed on to the consumer.


Andrew Silver is a Toronto-based freelance writer.


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