CIBC launches MasterCard – What Does That Mean to a Small Business?

CIBC launches MasterCard

On February 1, 2011, Canada’s largest Visa issuer, CIBC, announced that they are planning to launch 3 new MasterCards.

“Through the launch of our new MasterCard products today, we can now offer consumers more rewards, more features and more choice in credit cards.” Said Cheryl Longo, Executive Vice-President, Card Products, CIBC.

This would appear to be wonderful news for cardholders, who will now have yet another choice in the credit card they choose to use.  MasterCard traditionally offers rewards programs like Airmiles and will the millions of Airmiles collectors in Canada, this will surely be welcomed.

However, what does this mean for merchants.  Well, remember about 3 years ago… when your fees started changing and all of a suddenly you started paying 3 times as much for your merchant processing for taking the same amount of transactions?  Well, this is precisely the reason why.

Historically, there was a ban against dual issuing of cards.  The financial institutions were only allowed to issue either Visa or MasterCard credit cards to their clients.  When the ban was lifted, the race to win over issuers started between the two large credit cards.

And how do they win over Issuers?  By using a little thing known as Interchange.  Interchange is the flow-through of charges from the Acquirers to the Issuers. And Acquirers would then use this Interchange to set their pricing for merchants. Interchange was historically set at the same percentages for all card types.  It was easy.  It was about one and half percentage minus 25 cents for both Visa and MasterCard.  And this didn’t change for more than 30 years.  Canada’s pricing was way behind the rest of the world.  But when the dual issuing ban was lifted, the credit card companies knew now their portfolio was at risk of the other card brand.  They need to set their Interchanges at rates that would not only attract other Issuers but also to maintain their own portfolio.  The fear was that an issuer would flip and start to issue the other card brand.

So what they introduced was a new interchange structure.  An interchange structure that would include different rates for not only different types of cards like consumer versus corporate cards, but also included difference rates for the way the card was accepted, either card present or card not present.  And they introduced a new premium credit card.  A card that would be issued only to the highest spenders of their portfolio but also carried the highest interchange rate.  (but we all know this wasn’t the case when everyone started to get these cards in the mail)  All of this was set on the backs of merchants.

These interchange rates were charged to the Acquirers and as such, the Acquirers had no choice but to raise the merchants’ rates so that they would not be losing money.  And this was when terms like “non-qualified transactions” became a norm in merchants’ statements.

While Canada’s payment processing industry may have been behind the times a couple of years ago, we have certainly made up some time and caught up now.  You can expect to see more and more dual issuing financial institutions as the card brands continue to battle for marketshare.  And unfortunately, you can also expect to see your rates continue to rise in order to support this practice.

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