Visa and MasterCard agree to lower average credit card interchange fee below 1%

The government has announced new details of an agreement with Visa and MasterCard that will see them lower the amount that they charge retailers when a customer pays for a purchase with a credit card.

Known as so-called interchange fees, they have long irritated merchants by allowing the credit card company to keep a percentage of every sale, instead of a flat fee for each transaction.

On Thursday, the government announced a deal with the two card companies that will reduce interchange fees for in-store transactions to 0.95 per cent, on average.

That means on a $100 purchase, if a customer pays with a credit card, the retailer will get at least $99, where they previously would have kept as little as $97 in some cases.

A government release says on average, the deal will reduce the typical fee that a merchant pays by 27 per cent.

The fee reductions are expected to save retailers about $1 billion over five years and "make credit card transactions fairer for small businesses, which have less bargaining power than larger merchants to negotiate lower rates," the government said in a release.

Many other jurisdictions, including the European Union, the United Kingdom, Israel, Australia, China and Malaysia, have capped interchange fees at well under one per cent, but in Canada some cards can charge up to three per cent. Currently, the average interchange fee for a Canadian Visa credit card is 1.4 per cent, Visa says.

Merchants were forbidden from passing those fees on to consumers directly for years, but that all changed last fall when the credit giants agreed to settle a class action lawsuit over the matter, a deal that saw them agree to refund businesses hundreds of millions of dollars for what they charged in interchange fees over the years.

Part of that settlement allowed retailers to start adding a surcharge to customer bills to cover the fee, which led to increased attention among shoppers.

WATCH | Why businesses can now charge you for paying with a credit card:

While businesses welcomed the settlement, it didn't do anything to govern the actual amount of the fee being charged, and the government hinted in its recent federal budget that it would weigh in on the issue soon.

Businesses with annual Visa sales volume below $300,000 will qualify for the lower fee, as will those who do less than $175,000 from MasterCard.

The Canadian Federation of Independent Business (CFIB), which has been drawing attention to the issue for years, called the deal a "significant accomplishment" but wishes that the timeline to implement the new fee structure could be moved up from its current target of the fall of 2024.

"CFIB will be encouraging government to deliver on its commitment to ensuring other card brands — including American Express — take similar measures ... as well as a regular review of the size thresholds to ensure more small businesses can benefit from these lower rates in the future," the CFIB said in a release.