Small business payment challenges and opportunities: An interview with CFIB

Dan Kelly is President and Chief Executive Officer of the Canadian Federation of Independent Business (CFIB), a non-profit organization representing over 97,000 members. CFIB is devoted to creating and supporting an environment where businesses succeed, including how businesses pay and are paid. Dan discusses the hurdles entrepreneurs and small businesses encounter in the evolving payment landscape, potential solutions — including changes to the Canadian Payments Act — and emerging payment trends that will reshape the industry.

What are the biggest payment issues or challenges that Canadian small businesses face today?
There is no doubt that the payment processing landscape can be daunting, confusing, and expensive for Canadian small and medium-sized enterprises (SME). Here are a few of the issues I hear about the most:

High transaction fees
Many small businesses in Canada are concerned about the high fees associated with payment processing, especially for credit card transactions. In fact, in a recent survey, the cost of accepting credit cards has consistently been cited as unsustainable by more than three-quarters of small business owners (79%).¹ Canadian consumers are now addicted to rewards points and more and more transactions are moving to consumer credit cards, particularly with the inflationary strain on household budgets. It is good news that the Federal government has negotiated a new deal with Visa and Mastercard to lower interchange rates for small businesses, but there is a lot of work to do before the fall of 2024 to ensure the savings are successfully passed on to entrepreneurs.

Complex fee structures
Payment processing companies often have complex fee structures with varying types of costs, including transaction fees, chargeback fees, PCI compliance fees, monthly fees, assessment fees, interchange fees, and more. Understanding these fees and how they apply to different transactions can be challenging for small business owners.

Chargebacks
Chargebacks are a growing problem for small businesses as consumers discover ways to get refunds from their credit card issuers. While chargebacks are designed to protect consumers from fraudulent or unauthorized transactions, they can pose a significant challenge for small businesses. In fact, chargebacks can result in financial loss, leaving the business owner with the loss of the actual product, the loss of the payment, and various penalties. Small firms often feel powerless to push back even if they have taken every step to ensure the transaction is legitimate.

Managing cash flow
While there are several consumer payment options, more and more is built upon the high-cost credit card system. Many fintechs are providing great value-added services, but they generally add even higher costs on the existing high-cost model. We need more options like the low-cost, flat-fee Interac debit card system in Canada that has served merchants well for decades. I am excited by the opportunities provided by the Real-Time Rail (RTR) payment system work that is happening as we desperately need another big innovation to change the payment paradigm.

The RTR may finally provide the innovation we need to improve the business-to-business payment (B2B) system. The reason many small businesses continue to use business cheques to pay each other is that it is viewed as lower cost compared to other systems, such as credit cards, and provides a paper trail with related invoices and cancelled cheques. I will be very pleased if Canada gets a ubiquitous system for B2B transactions with low, flat-fee transactions and a deep exchange of data supporting the requirements by the CRA auditors. This would finally reduce the panic around money and invoices being stuck in the mail during postal strikes, which continues to be a thing for too many SMEs in Canada. 

Information security and payment fraud
Some of the biggest challenges in payment processing for small businesses are related to information security and payment fraud. From the small business perspective, ensuring the security of payment transactions and protecting customer data can be a daunting task. While many businesses must comply with data security standards, such as payment card industry compliance (PCI), the implementation can be quite costly and complex. Increasingly, small businesses have become targets for payment fraud (e.g., chargebacks, counterfeit currency, and online payment fraud) and having to implement effective prevention measures can also be quite costly and resource-intensive. While it is essential for small businesses to adapt to changing payment trends in order to remain competitive, staying compliant and mitigating fraud risks can be overwhelming. 

The Canadian Federation of Independent Businesses (CFIB) was a signatory of a joint industry letter to the Minister of Finance on the need for changes to the Canadian Payments Act to broaden access to Canada’s payment infrastructure. What potential opportunities or benefits do you see broader access delivering to Canadian businesses?
As new technology and services continue to transform the way payments are made and processed, amending and broadening access to the Canadian Payments Act can help modernize Canada’s payment landscape. There are several benefits of expanding the membership beyond traditional banks to include a broader range of financial service providers, such as fintech companies, payment service providers, and other non-traditional financial institutions. Allowing for a more diverse group of financial service providers can ensure the path is open for innovation and encourage the development of new user-friendly, accessible and cost-efficient payment solutions for small businesses. It can also foster competition within the industry, which can drive costs down and improve financial services. Expanding the Act has the potential to provide a more comprehensive regulatory environment in which everyone can operate.

Which emerging payment trends and technologies do you foresee having the biggest impact on small businesses in Canada in the coming years?
Open banking has the potential to have a significant impact on small businesses. With the ability to give businesses more control over their financial data and account information (e.g., greater access to financial data, the ability to seamlessly bank at multiple institutions, more options for efficient financial transactions, a broader range of financing options, etc.), small businesses will be better able to compare their financing options.

As outlined earlier, real-time payment systems have the potential to impact small businesses in a big, positive way. I hope this will lead to the creation of a greater range of payment options in order to put downward pressure on interchange fees. And if this innovation leads to new ways for businesses to invoice and pay each other with immediate access to their funds, that will be a massive improvement over what we have now. Of course, we need to get the policies and infrastructure right to encourage new market entrants and innovations among existing players.

You spoke on a panel at The 2023 Payments Canada SUMMIT about how government and industry are working to support conditions for success amongst a new generation of Canadian SMEs. If there was one message you hoped the audience walked away with, what would it be?
From my perspective, we have come a long way in improving the payment system for the better. I remember the dark days when premium credit cards were first issued in Canada, leaving merchants with new costs and no idea why. The Code of Conduct really improved the relationship between small merchants and payment giants, but more work is needed to ensure innovation results in real improvements for the users of the payment system. While there are many new exciting fintechs in the market, I’m hoping Canada can get Open Banking and the RTR right to finally bring some new, market-changing innovation to the table. I believe we are on the cusp of some big changes that have the potential to improve the marketplace for small businesses across Canada.

¹ CFIB, Credit and Debit Cards Survey, June 10 - June 25, 2021, n= 4,339.