Canada has experienced two main waves of COVID-19: the first wave in Spring 2020 and the second wave, within which we still find ourselves, which grew in intensity starting in November last year. As with so many other things, Canada falls somewhere between the European and U.S. experiences with respect to COVID-19. Citizens have not been subject to strict stay-at-home orders, though they have been exhorted to do so by several of our provincial governments (and there is significant regional variance in rules as there is in infection rates).
Retail by contrast, has been subject to two lockdown periods, tracking the two COVID waves, and especially in Ontario and Quebec, which represent almost two-thirds of Canada’s population and economic activity. The rules vary by province, but effectively, bricks-and-mortar retail has twice been closed for several months at a time, with only e-commerce and curbside pick-up allowed to retailers other than those in grocery, pharmacy, convenience and gas stations. Unsurprisingly, the first major effect on general merchandise retailers has been to drive an increasing proportion of sales online.
From a payments perspective, the COVID-driven trend toward e-commerce has been pretty costly. E-commerce by its nature eliminates cash payment and given the anemic nature of our Interac debit system for online transactions, the credit cards networks and issuers have had a field-day. This problem has been exacerbated by Mastercard’s 2019 decision to drop its 2020 interchange rates on in-store transactions while significantly raising its rates on e-commerce. That decision could not have contemplated COVID-19, but its effects are being felt far more than had been anticipated.
E-commerce’s share of retail has ebbed and flowed with the extent to which bricks-and-mortar stores have been locked down by public health order. One trend has been inexorable, however; with each reopening of retail, the level of e-commerce remains at a far higher level than it was pre-crisis. In October 2020, when retail stores had all reopened Canada-wide, retail e-commerce sales were up by 67.7 percent year-over-year, while total unadjusted retail sales increased by 9.1 percent.
Even before the first retail lockdowns, we saw increased card use as customers shied away from using cash, given concerns that banknote and coin surfaces might present a risk of COVID-19 transmission when passed from hand-to-hand. Within that spike in card use we have seen an increase in contactless payment, as customers sought (and in some cases merchants insisted upon) avoidance of contact with PIN-pads. Availability of contactless debit and credit was pretty much ubiquitous in Canada pre-crisis, but our public heath situation has encouraged an ever-greater number of shoppers to switch to tapping rather than dipping their cards. Visa reports that 64 percent of Canadians are using contactless payments wherever possible (compared to the global average of 58 percent), up from 52 percent last summer. After an initial dip in spending in mid-March 2020, Interac debit use increased by 66 percent in August 2020 as compared to April 2020. Interac Flash (contactless debit) transactions increased 74 percent over the same period. For example, Interac Flash transactions were up 85 percent in restaurants and other eateries including fast food outlets, and 44 percent in grocery stores and supermarkets within this period.
Both debit and credit networks have seen significant growth, but the elimination of cash has inevitably increased credit’s share of the payments mix. As some readers will know, there is a greater disparity between debit and credit costs in Canada than in most other jurisdictions, with debit costs at a few cents per transaction and credit costs at ad valorem rates. To put this in perspective, one sizeable Canadian drug store retailer (annual revenues $1.4 billion USD) reports credit card costs at 1.7 percent in 2021, while debit costs are reported at only 0.1 percent. This distinction between debit and credit costs has become even more important during the health crisis, as will be seen below.
Canadians’ growing fondness for contactless payments should have led to a distribution as between credit and debit similar to that in a chip-and-PIN setting, but deliberate moves by networks and issuers have pushed credit to the forefront. Prior to the crisis, contactless payments were limited to $100 CDN per transaction, whether for debit or credit. Under the guise of contactless being a more sanitary practice, the networks increased the tap limit on credit cards to $250 CDN. So far so good. But when it came to requests to do the same thing on debit, the Interac system found itself unable to move forward due to “governance challenges.” Those of a suspicious frame of mind might note that the governing body of Interac is comprised of the very bank issuers who do so well from credit card interchange.
Raising the tap limit for credit but not debit has had predictable effects. Presented with the choice of having a single straightforward contactless payment option on transactions over $100 CDN customers have migrated toward credit use. One major grocer and pharmacy retailer in Canada has reported a 46 percent increase in in-store credit card fees since before the health crisis.
So, there you have it: vastly increased e-commerce, including seemingly, the base level of e-commerce even when physical stores are open; increased interchange fees imposed on online transactions; and a deck stacked in favour of credit card use in the rapidly growing area of contactless payment. Many Canadian retailers and certainly those in mixed merchandise categories are currently engaged in a fight for survival in which payments costs are only a small part of the picture. When the dust does settle, Canada’s retailers are going to be facing major advocacy challenges to get policymakers to address the additional bite that credit card fees are taking through changes in customer behaviour and payments industry practices.