Working Paper No. 13-58:
Credit Where It’s Due: How Payment Cards Benefit Canadian Merchants and Consumers, and How Regulation Can Harm Them

Author(s):

Ian Lee, Geoffrey A. Manne, Julian Morris, Todd Zywicki

Date Posted: October 2013

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Abstract:

In recent years, some Canadian politicians and powerful interest groups have issued increasingly vocal calls for dramatic regulatory interventions into the country’s payment cards system. In particular, they have called for a “hard cap” price-controls on interchange fees, a ban on contractual terms that prohibit card-accepting merchants from imposing surcharges on consumers that use payment cards, and a ban on so-called “honour all cards” rules that require a merchant to accept all payment cards issued under any payment network’s logo.

Advocates claim that these interventions will benefit businesses (especially small and medium-sized merchants) and consumers. An examination of economic theory and available empirical evidence, however, demonstrates that these claims of the benefits of intervention are unsupported. In particular, review of the effects of payment card regulation in the U.S., Australia, and elsewhere suggests that price controls and other interventions result in higher banking and credit card fees for consumers, while retailers are unlikely to pass on much of the savings to consumers. There is every reason to believe the same outcome will continue to occur in Canada if current efforts to regulate are enacted and unless existing regulations are relaxed.

Instead of imposing regulations on the operators of payment card networks, which would undermine competition and harm consumers, Canada should seek to promote increased competition. The most effective way it can do that is by removing currently-existing legal barriers to competition that support a monopolistic structure in the debit card market and prevent Interac and other card networks from competing fairly with each other. Equally important is avoiding the imposition of costly new restrictions that would interfere with freely-bargained contractual rules between card networks and merchants that benefit consumers, such as no-surcharge rules (which protect consumers from surprise price increases at the register) or honour-all-cards rules (which guarantees ubiquitous acceptance of consumers’ cards).