Agreement with banks and credit card companies to cut interchange fees for merchants won't have the desired result, say the authors of an MLI report on the effects of regulating payment cards. Ian Lee of Carleton University and Todd Zywicki of George Mason University are available to the media for comment.

OTTAWA, Nov. 3, 2014

Government interference in credit cards will only increase fees for those who use them, restrict access to people from lower-income brackets and create minimal to no benefit for small merchants, according to an analysis by the Macdonald-Laurier Institute.

It is being reported that the federal government will announce this week a voluntary agreement with banks and credit card companies to reduce interchange fees charged to retailers and service providers.

Controlling the price merchants pay to accept credit cards as a form of payment is designed to lower costs for consumers. The argument goes that merchants will pass these savings onto their customers in the form of lower prices. The problem, says a 2013 MLI report on the subject, is that this isn’t how it works out in practice. “Credit Where It’s Due: How payment cards benefit Canadian merchants and consumers and how regulation can harm them” found that price controls cost consumers, particularly lower income consumers, and help only large merchants.

Credit card companies such as Visa and Mastercard require the fees from merchants to fund their operations. Reducing the amount they can charge merchants forces them to rely more on their other source of income: consumers.

“Where government intervenes to reduce the amount contributed by merchants, those revenue losses inevitably are passed on to credit card users in the form of higher prices, reduced access, or reductions in innovation and quality”, says Todd Zywicki, one of the report’s authors and a law professor at George Mason University.

This also tends to increase the minimum balance required for free chequing, making bank accounts more expensive for lower-income consumers.

Meanwhile store owners, who benefit greatly from the efficiency and convenience of card payments, rarely pass on whatever savings they receive to customers.

The changes tend to hurt small retailers as well. Credit card companies will frequently eliminate industry-specific discounts they offer under market-based pricing.

“Credit Where It’s Due” is co-authored by Zywicki, Reason Foundation vice-president Julian Morris, Carleton University professor Ian Lee and International Center for Law and Economics Director Geoffrey Manne.

Zywicki and Morris testified remotely on Thursday before the Senate Standing Committee on Banking, Trade and Commerce during hearings on Bill S-202, an act to amend the Payment Card Networks Act. For CPAC coverage of the hearings click here.

To arrange an interview with one of the authors, please contact MLI Communications Director and Managing Editor David Watson at 613-482-8327 x103 or