Walmart recently announced it would soon stop accepting Visa credit cards following a dispute regarding merchant fees associated with these cards. The state of competition in credit-card markets has long been criticized, and a federal bill has recently been introduced aiming to cap these merchant fees. Yet Walmart's move proves that competition is vigorous in the credit-card market.
It is a longstanding canard that competition among credit-card operators is lacking. This has recently been used as an excuse to threaten further regulation of reward programs. What a bizarre myth to endure, at a time when store brand payment cards, so-called "fintechs" like Bitcoin, and alternatives like Apple Pay are flourishing. The fact that Walmart would be able to stop accepting Visa, historically one of the largest operators of credit cards, speaks mountains about the alleged market power of credit-card companies: It is simply not that big. You have significant market power when you are unavoidable, not when one party in the exchange simply wishes your prices would be lower.
For a large company to renounce a particular kind of card can be part of a healthy competitive process; for the government to cap certain fees through legislation is not. While there can be no doubt that a large and successful corporation like Walmart has done its due diligence and now thinks it's better off without Visa, the credit-card fees paid by merchants do pay for a host of benefits.
Not only do merchants gain the ability to better serve the network of credit-card users, but they get protection against fraud and a guarantee of receiving payment, the immediate transfer of funds, greater personal safety since there is less cash in the till, and simpler accounting thanks to electronic data processing.
There are many international examples of countries that have capped credit-card merchant fees. Most of the time, this was accompanied by a promise that prices would fall for the consumer. This never materialized in any of the places that adopted these policies. What did happen is that annual fees paid directly by the consumer increased.
In Australia, annual fees for basic credit cards increased by 22 per cent, and for cards with a reward program it was 77 per cent — while the value of rewards dropped by a quarter. In Spain, average annual credit-card fees increased by 11 euros, and credit-card interest rates increased as well. In the United States, whereas 76 per cent of chequing accounts offered by banks were free in 2009, this proportion fell to 38 per cent by 2013 after the new law had come into effect.
These developments were predictable. Without revenues from merchant fees, financial institutions have to find new ways to finance the payment system.
The U.S. in particular serves as a prime example of the perverse effects misguided legislation often triggers. Legislation similar to that recently introduced in the House of Commons caused merchant fees to be calculated the same way regardless of the amount of the transaction, and to include a fixed portion as well as a percentage. The result was that fees have indeed become smaller, even negligible, for large purchases, yet increased by up to 1,000 per cent for the smallest transactions. The burden of financing the payment system was therefore shifted disproportionately from large ticket vendors to stores that sell inexpensive items.
Government intervention in the economy often has unintended consequences that end up harming the very people they are meant to help. Those who favour such intervention seem to imagine that they can manipulate the various members of society as easily as one moves different pawns around on a chessboard. They do not account for the fact that pawns on a chessboard have no impulses other than those of the hand that controls them. In a market economy, unlike in chess, each merchant and each consumer has his or her own motivations, which are not necessarily the ones that legislators would like them to have. Trying to help Canadian consumers by regulating credit-card fees would certainly entail negative unintended consequences for them, as has happened elsewhere in the world.
Mathieu Bédard est économiste à l'Institut économique de Montréal. Il signe ce texte à titre personnel.