What’s at stake for banks in Ottawa’s credit card fee review

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Senior executives at Canada's largest financial institutions are on pins and needles this week. Some are arguably on the verge of freaking out. After years of uncertainty, Ottawa finally looks set to rule on credit card interchange fees.

It's a messy, complex file that has hung over banks and credit card companies for nearly five years. Because so much time has passed since the federal Competition Bureau first tried to tackle the issue in 2010, it can be hard for outsiders to appreciate how much money is now at stake – and why there's so much anxiety.

When the Bureau first did their research, they estimated interchange fees, which are charged every time someone pays for goods or services using their credit card, amounted to $5-billion annually. Since then, updates have been hard to come by because the banks do not break out interchange revenues in their financial statements. When pressed, they often say they don't disclose such information for "competitive reasons."

But analyst Gabriel Dechaine at Canaccord Genuity, who has followed the credit card file closely, recently took a stab at running some numbers to predict the extent to which the Big Six banks would be affected by a fee cut.

Overall, Mr. Dechaine estimated that interchange revenues comprise four per cent of Canadian banks' earnings per share. If there is a 10 per cent haircut to interchange fees, he expects that EPS would fall by one per cent, all other things being equal.

That may not sound like much, but there's more to the story.

First, if a cut comes, it could very well be greater than 10 per cent. Plus, one per cent of EPS matters more and more in this environment. "While not a devastating amount, it is clearly not helpful to a sector struggling to generate five per cent revenue growth in its Canadian [personal and commercial banking] operations," Mr. Dechaine wrote in a note to clients in September.

The growth potential must also be considered. Credit card use is booming, and will likely only continue. In 2008, credit card transaction volumes from Visa and MasterCard networks in Canada amounted to roughly $255-billion; in 2013 they totalled $350-billion. This seven per cent compound annual growth rate compares to a 4 per cent equivalent rate for Interac volumes.

So even if the immediate hit doesn't seem too dramatic, the new rules would cut into a hot revenue stream. And maybe more importantly, it cuts into a source of profits that, aside from this regulatory threat, is more or less risk-free.

In an era where the banks are trying to get back to basics, transaction fees are some of the safest revenues they can find. "Credit card growth has become more valuable to the banks from a balance sheet perspective, as we are in an environment where capital has become dearer and leverage has become a bad word," Mr. Dechaine noted.