Cheques Make a Comeback as Small Businesses Look to Avoid High Credit Card Transaction Fees: Bank of Canada

Credit cards are displayed in Montreal in a file photo. (Ryan Remiorz/The Canadian Press)

The paper cheque is gaining back its popularity among small businesses as they look to offer more payment options to avoid the high transaction fees that come with accepting credit cards, according to a study by the Bank of Canada.

“Merchants mentioned accepting a wider range of payment methods because they need to make sales and accommodate an equally wide range of consumer preferences for payments,” said the study, titled “The 2021–22 Merchant Acceptance Survey Pilot Study” (MAS), published on Jan. 4.

The survey, conducted by phone with 488 merchants with fewer than 50 employees and that are not part of a chain or franchise, noted that cheques have made a comeback in the transactions of these retailers in recent years, as first reported by Blacklock’s Reporter.

“Acceptance of cheques has increased in 2021–22 to 54 percent compared with the 2018 MAS finding (34 percent) but stayed below the 2015 retailer survey level (64 percent),” said the study, whose survey took place in autumn 2021 and spring 2022.

The use of cheques was highest in Atlantic Canada at 70 percent, followed by the Prairies (67 percent). Ontario and Quebec tied at 54 percent while British Columbia was the exception with higher-than-average cheque acceptance (41 percent in 2018), but now ranks at the bottom with 37 percent.

While business owners told the central bank that cash remains “the fastest and most reliable payment method and has the lowest fees,” credit cards received the least favourable rating (highest fee) when compared with cash and debit cards.

Regulating Swipe Fees

In 2021, the federal Department of Finance launched online consultations on the regulation of interchange fees on credit cards. No legislation has resulted as yet.

The Financial Consumer Agency of Canada has also been promoting a voluntary “Code of Conduct for the Credit and Debit Card Industry” since 2010, urging card issuers to increase transparency and disclosure when they make changes to their transaction rates.

Countries that regulate credit card fees include Australia, whose central bank in 2003 imposed a 0.5 percent cap on the interchange fees of Visa and MasterCard. The European Union followed suit by adopting its Interchange Fees Regulations in 2015 that capped charges at 0.3 percent.

Clearly Payments, a Vancouver-based payment processor, states on its website that the interchange rate to accept a Classic Visa card is 1.25 percent, while it’s 0.92 percent for a basic Mastercard.

According to Blacklock’s Reporter, Visa and MasterCard, which process 94 percent of all credit card transactions in Canada, collect an estimated $5 billion a year in fees imposed on retailers.

In July 2020, Bloc Québécois MP Alexis Brunelle-Duceppe introduced Bill C-243, An Act to amend the Payment Card Networks Act, which seeks to regulate swipe fees.

“The purpose of this bill is to regulate interchange fees, which for far too long have been negotiated behind closed doors at the banks,” Brunelle-Duceppe said.

“I point that out because SMEs [Small and Medium-Sized Enterprises] are relying more than ever on credit card companies, especially during COVID, without being able to do anything about it.”

Testifying before the Commons finance committee in June 2020, Gary Sands, senior vice-president of the Canadian Federation of Independent Grocers, said the tight profit margins of some small businesses, about 1.5 percent, were squeezed by swipe fees.

Finance Minister Chrystia Freeland said in her Fall Economic Statement 2022 that the federal government will start negotiating with credit card companies, banks, payment processors, and businesses “to lower credit card transaction fees for small businesses in a manner that does not adversely affect other businesses and protects existing reward points for consumers.”

“Should the industry not come to an agreed solution in the months to come, the government will introduce this legislation at the earliest possible opportunity in the new year and move forward on regulating credit card transaction fees,” Freeland said.

‘No Economic Justification’ to Regulate

Jack Carr, professor emeritus of economics at the University of Toronto, has a different take. In his testimony before the Commons finance committee in June 2009, he argued that there are “flaws” in the arguments of those who said interchange fees are detrimental to the bottom line of merchants.

“The first flaw is that merchants do receive benefits from payment card systems,” Carr said.

“They get increased sales and increased convenience. Increased merchant sales rise because when people use credit cards to make purchases, and larger purchases, they bring in new types of purchases, and you get increased sales because there are lower transaction costs.”

The professor compared the swipe fees with labour costs.

“When I go and fill up my car with gas, they don’t need as many employees because I pay myself. I put my card into the machine. If everybody paid cash, you would have huge lineups. Also, the merchants don’t have to hold cash balances, which generally are costly.”

He added that there is no economic justification for cost-based regulation.

“Cost is one factor, but it’s not the only factor. It’s a more complex system, and by limiting the justification of interchange fees only to cost, the argument fails to account for the respective benefits that merchants and cardholders derive from interchange fees,” he said.

“The third flaw is that retailers are not forced to accept credit cards as payment methods.”