Merchant Banking in Canada Essay Example

Merchant banking

Introduction

Small businesses have benefited from the growth in merchant banking in Canada. They are established to help in managing businesses finances and at the same time simplify the business planning process. Small businesses have in the past faced substantial challenges on how they manage their finances especially due to the uncertainty of the available payment platforms, but the evolution of credit and debit cards have made it easier for the business to record various transactions (Crawford, 7). However, there has been cases where businesses have faced noteworthy challenges mainly relating to the breakdown of the point of sales, and the presence of hidden costs which has affected the revenue growth primarily to the small businesses. Small businesses incur operation costs of as high as 3.5% per transactions when the point of sales is used which increases the business costs thereby reducing the profitability (The Globe and Mail, 4). As a matter of fact, most of the small businesses have reported the breakdown of various gadgets and their inability to cancel various leases relating to the point of sales has further reduced their overall incomes. With the use of the Code of Conduct for the Credit and Debit Card Industry in Canada, the Canadian government can control utilization and the implementation of the credit and debit cards to safeguard the interests of the small businesses if the implementation is done (Canada.ca, 2).

Merchant banking has achieved major economic growth in the past, but at the same time, the sector has also experienced significant problems. The Canadian government controls the merchant’s banks through the code of conduct that has been established (Crawford, 5). Furthermore, the Canadian banking industry is guided by the code of conduct that governs the credit and debit card industry. Credit and debit cards primarily influence the operations of the merchant’s banks and other retailers since it helps in defining their sales growth. The main aim of the code of conduct is to ensure that merchants are conscious of various costs related to debit and credit cards and this gives the merchants the ability to do their monthly focus and through this, they have the potential to monitor their revenues (Roseman, 4). Besides, the code of conduct also helps the merchant’s banks to plan for their future operations since they have the elasticity they need to ensure that they institute various measures to succeed in the market. At the same time, they have the ability to make sure that they can initiate payments options in the long run. Over the years, the code of conduct has enabled the merchants to carry out their operation in the right manner.

The Canadian government has policies in place that helps in regulating the merchant industry especially in regards to disclosure and the scope operation. This is meant to protect the businesses as well as the customers from fraudulent activities (Canada.ca. 1). Businesses in Canada has in the past reported hidden costs which have affected their operations and at the same time impacted their sales. Hidden costs are harmful to the business operations since they produce misleading reports and also they may influence the reputation of the merchant’s banks. The element of trust is essential in the banking sector, and proper planning helps in allocating the right resources to various business operations. On the other hand, the presence of hidden costs increases the business overhead (Dan Kelly, 2).

There have been reports by multiple businesses over the years that they have been faced with the increasing hidden costs which have emanated from the use of the credit and debit cards. Furthermore, there has been cases where up to 4.6% of the sales value of the total operations is paid as the operating costs, and this is detrimental to the business (Roseman, 4). It is important for the merchant’s banks to provide all the information associated with the credit and debit cards transactions to ensure the business plans for the future and in the process decide on the methods of payments that it is likely to allow. Small businesses may even forego the use of debit cards if such is likely to increase their costs of operations especially since their revenues are limited to some extent (Dan Ovsey, 6).

Leasing, Interac fees also has affected business operations especially due to the presence of hidden costs, and this has trimmed profits of most business operations. Even though the voluntary code of conduct has been in effect to help in protecting the merchants, this has not been the case for the enforcement of the voluntary code of conduct has been a major issue. Even if the code of conduct is in place, it is yet to be implemented in the right manner, and therefore the small businesses are yet to be protected (CBC News 4). The high costs associated with the merchants banking should be regulated to aid the small businesses in running their operations. Therefore, it should also ensure that it gives the business the flexibility it needs to succeed in the market given that the unreliability of point of sales, the presence of hidden costs as well as the high cost of leasing the point of sales has affected the business revenues in the long run. Businesses have expressed the need to regulate the merchant banking industry expressly in the increasing cost of operations particularly those relating to small businesses. With this in mind, the point of sales providers should also ensure that they are reliable and that they can be applied in the right way to the business operations (Carlos and Varya, 2).

One of the major challenge facing the business is the unreliability of point of sale devices. In addition to this, businesses have to honor the lease agreements even in cases where the point of sales is unreliable which limits the flexibility of business operations. If the business decides to terminate the rental agreement with the point of sale providers, hence this may increase the cost of operations since the business may incur high penalties associated with this cancellation. Small business does not have the ability to cancel the leasing agreement since it will significantly reduce the revenues(The Globe and Mail, 6). Nevertheless, the breakdown of the point of sales gadgets limits the flexibility of various means of payments making it harder for the businesses involved to succeed in the market eventually. Even with the code of conduct in place, the business owners are still facing significant challenges since the gadget providers still have not been able to solve these problems associated with the point of sale even with the emergence of new technologies in the banking industry (Dan Kelly, 8).

The annual income was emanating from the use of the debit and credit cards averages between $5-billion to $7-billion annually that includes the 2-3% total cost of the transactions paid by the small businesses to the point of sale providers (Mark Taylor, 6). However, competition in merchant industry in Canada has increased the level of services offered especially with the launch of international companies such as Square. Canada has managed to record increased number of merchants banks and other operators that helps in facilitating the online payments thereby giving the small business an opportunity to consider some options available in the market (The Globe and Mail, 7). Companies such as FreshBooks have provided the consumers of online payments with the platform they need to execute various business operations. The availability of different payment solutions to small business is paramount since it helps them in managing their operations and in the process plan for their future since it gives them the flexibility they need to execute their operations. FreshBooks assist in facilitating the payment options since it helps in improving the communication between the business owners and the consumers who may be in need of various products in the market thereby improving the exchange process. It charges 2.9 percent flat fee while other companies such as Payfirma have a variable payment system in place which is also fundamental to the success of any business operations (The Globe and Mail, 4).

The use of stripe form of payment has been necessary for the Canadian economy since it has helped businesses to overcome major problems that are linked to other forms of payments. Even though stripe is mainly meant for those who conduct online transactions, its use by a large number of business is limited since the existing features meet individual business needs (Tom DeSimone, 3). The volume issue associated with Stripe as a means of payment has been ironed out thus enabling the business to be successful in the long run. Further stripe offers to bother the payment processing and the developer tools to its customers which help in diversifying its operations.

According to Carlos and Taylor (5), the credit cards are stacked against small businesses thereby complicating their operations. The merchant’s banks offer the point of sale services to help the business in predicting and controlling the future costs, but this is not usually the case. Credit and debit cards assist in improving the business operations but at the same time has negative impacts due to high costs associated with the acquisition and the operation of credit cards (Dan Kelly, 4). Merchants’ banks and the credit cards issuers acquire 2-3.5% of the total costs of the transactions. This is harmful to small business since it helps in reducing the business returns thereby curtailing the business expansion. Businesses are always seeking for better ways to make payment and at the same time ensure that the business returns are not affected in the process (Dan Ovsey, 8). Accountability is, for that reason, important when running business operations and the merchants’ banks should ensure that the transactions are sustainable by given then THE ability to predict the future business costs. Therefore, the use of credit and debit cards should not act as a burden on the businesses. Therefore, the cost of the credit and debit cards should be at the minimum to help in facilitating the business operations.

MasterCard agreement with the Canadian Federation of Independent Business has set the tone for the reduction of the costs related to the point of sale services. The agreement was significant for the reduction of high cost of operations that emanate from the use of the credit and debit cards. It is important to ensure that the small businesses are well protected to give them the ability to expand and lower the cost of their operations. In 2014, both the MasterCard and Visa had the agreement to ensure that they hold interchange fees at 1.5% for five years which is important to the small businesses. The Canadian government has a role to play especially in making sure that the rate of inflation is reduced primarily relating to the use of point of sale services. The decision by the MasterCard and Visa is important given that it will also help small businesses in planning for the future.

Merchant banks, Credit and Debit card providers and the government all have a role in protecting the small businesses against high costs associated with the use of point of sale services. Even though they are meant to reduce the cost of operations and give the business owners the ability to predict future costs, this has not been the case given that the code of conduct available has not been implemented in the right manner (The Globe and Mail, Feb 2017, 3).

Conclusion

Merchant industry in Canada has been able to achieve tremendous success in the past, but the greatest challenge facing the sector has been unreliability and the high cost of operations. Even though the use of both the credit and debit cards helps in planning for the future business operations, it negatively affects the growth and expansion of small businesses due to the high cost of operations. There have been cases where the inflation on the cost of operating the point of sales has increased thereby making it difficult for the small businesses to maintain sustainable business operations. On average, the debit and credit card issuers, as well as the merchant banks, collects 3% of the total cost of transactions which is high depending on the price and the prices of the product. This, in the long run, may contribute to the increase in the prices of the products if it is not managed in the right way. The voluntary code of conduct and other available policies should be implemented to ensure that there is total disclosure and that hidden costs are eliminated in the process.

References

Canada.ca. (2017). Code of Conduct for the Credit and Debit Card Industry in Canada: Retrieved from https://www.canada.ca/en/financial-consumer-agency/services/industry/laws-regulations/credit-debit-code-conduct.html

Carlos Arango and Varya Taylor,(2009). Merchants’ Costs of Accepting Means of Payment: Is Cash the Least Costly?: BANK OF CANADA REVIEW. Retrieved from: http://www.bankofcanada.ca/wp-content/uploads/2010/06/arango_taylor.pdf

CBC News. (Mar 2012). http://www.cbc.ca/news/canada/manitoba/businesses-hit-by-hidden-fees-from-credit-card-machines-1.1224694

CBC News. (Nov 2014). Visa, MasterCard agree to hold interchange fees at 1.5% for 5 years. Retrieved from: http://www.cbc.ca/news/business/visa-mastercard-agree-to-hold-interchange-fees-at-1-5-for-5-years-1.2822985

Crawford. T. (Jan 2016). Class-action suit over credit card fees charged to merchants gets green light in B.C. Vancouver sun. Retrieved from: http://www.vancouversun.com/business/Class+action+suit+over+credit+card+fees+charged+merchants+gets+green+light/9672908/story.html

Dan Kelly, (2014). Canadian Federation of Independent Business. Financial Post — column published http://www.cfib-fcei.ca/english/article/6459-credit-cards-are-stacked-against-small-business.html

Dan Ovsey (Nov 2013). Jack Dorsey may have found the key to successfully selling technology to SMEs — not selling to them at all. Retrieved from: http://www.financialpost.com/m/wp/tag/blog.html?b=business.financialpost.com/m/m/m/m/m/m/2013/11/04/jack-dorsey-may-have-found-the-key-to-successfully-selling-technology-to-smes-not-selling-to-them-at-all

Mark Taylor. (July 2013). Merchants hope new rules bring transparency to the payments industry. Special to The Globe and Mail: Retrieved from http://www.theglobeandmail.com/report-on-business/small-business/sb-money/will-the-new-payment-processing-rules-satisfy-merchants/article13021792/

Roseman.E. (Aug 2013). Spa owner won’t pay $300 to leave Moneris: Roseman. Retrieved from: https://www.thestar.com/business/personal_finance/2013/08/23/spa_owner_wont_pay_300_to_leave_moneris_roseman.html

The Globe and Mail. (Feb. 2017). MasterCard Canada sets the new tone in fee battle. Retrieved from: http://www.theglobeandmail.com/report-on-business/small-business/sb-money/mastercard-canada-reaches-deal-with-small-business-group-to-lower-fees/article34038977/

The Globe and Mail. (Nov 2014). Top five online payment systems for your small business: Retrieved from http://www.theglobeandmail.com/report-on-business/small-business/sb-money/top-five-online-payment-systems-for-your-small-business/article21553705/

Tom DeSimone. 2017. Stripe Payments Review. Merchant Maverick. Retrieved from: https://www.merchantmaverick.com/reviews/stripe-review/