Canada’s Competition Bureau, an independent law-enforcement agency set up to ensure the country’s businesses and consumers are treated fairly, is seeking to remove some Visa Inc. and MasterCard Worldwide rules regarding merchants’ ability to offer alternatives to credit card use and interchange.

The Competition Tribunal began holding hearings May 8 in Ottawa, Ontario, to evaluate the potential impact Visa and MasterCard credit card rules could have on the local market. Once the hearings end in June, the bureau will make its decision, whch can be appealed.

In 2010, the bureau asked the Competition Tribunal, another independent body, to strike down what it deemed anticompetitive and restrictive rules the credit card companies imposed on merchants (see story).  Interchange fees merchants’ banks pay issuers of the networks’ cards range between 1.5% and 3% of the sale.

Specifically, the bureau is addressing rules that prevent merchants from treating holders of various card types differently and adding a surcharge to credit card purchases to cover their cost, and that require merchants to accept all cards from a specific network, even if a premium card has a higher interchange rate.

The bureau’s commissioner contends the network’s rules have eliminated competition, thus raising costs to merchants and in turn consumers. It wants the networks’ rules removed.

Both card brands responded in separate statements last week.

“If successful, the Competition Bureau’s actions could expose Canadian consumers to unfair checkout fees or gouging when they use their cards to pay,” MasterCard said. “Under our rules, merchants are free to encourage consumers to use other forms of payment and even to offer discounts for cash, [check] or any other payment option the merchant prefers. We intend to vigorously defend the merits of our pro-consumer policies to ensure our cardholders continue to be protected.”

In its response, Visa cited a December study by the Consumers' Association of Canada that found that 84% of Canadian consumers surveyed opposed enabling merchants to surcharge if shoppers chose to pay by credit card, and 90% of the respondents said they should have the right to choose their preferred payment method.

“Visa’s no-surcharge and [honor]-all-cards protections preserve consumer choice at checkout and ensure cardholders are not unfairly penalized for using their preferred form of payment,” Visa said. “We intend to vigorously defend these pro-consumer provisions during the upcoming Tribunal hearing.”

The hearing, which began May 8, will last five weeks, with final arguments following a week-long break.

This issue is different from the one that resulted in legislation limiting interchange fees for debit cards in the U.S. in 2010, analyst Scott Strumello of Auriemma Consulting Group, tells PaymentsSource. This issue before the tribunal is about credit card use.

Government regulation of credit card interchange fees did not go well in Australia in 2008 because it did not lower retail prices and it negatively affected rewards programs, says Strumello,

“Hence, the experience in that country proved that price controls on card transactions were effectively a transfer payment from banks to retailers, and consumers gained no benefit whatsoever,” says Strumello.

In Canada and in the longer term the U.S., government regulation of credit card interchange fees is inevitable, Aite Group senior analyst Rick Oglesby tells PaymentsSource. But the business model of the card companies to help their customers–financial institutions–make money from the cards can’t change quickly.

“They obviously are not able to just walk away from their business model, those banks and their customers,” says Oglesby. “They need to support those customers and help those customers protect their revenue streams. If the banks want to continue to fight it, Visa and MasterCard will continue to fight it as well.”

Regulation of fees lowers revenue, so Visa and MasterCard have to be creative and innovative with card-related revenue-generating alternatives, Oglesby says.

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