While Canadians love to pay with credit and debit cards, few are aware that their choice of payment can dramatically increase the cost of doing business for their local travel agency or other merchant. In fact, until recently, very few business owners were aware that credit card merchant fees were on the rise. And if current trends continue, the pain will not be felt just with the credit card system, but also Canadian’s fast growing payment method – debit cards…
While Canadians love to pay with credit and debit cards, few are aware that their choice of payment can dramatically increase the cost of doing business for their local travel agency or other merchant. In fact, until recently, very few business owners were aware that credit card merchant fees were on the rise. And if current trends continue, the pain will not be felt just with the credit card system, but also Canadian’s fast growing payment method – debit cards.
Here’s how it works: In the past couple of months, many credit card holders have begun to receive new premium affinity cards from their banks. These new cards come with additional benefits to consumers who spend a certain amount of money, but the cardholder is not being asked to directly pay for the cost of these new benefits. Instead, it is the merchant who is left holding the tab.
Instead of the standard merchant fee arrangement, the credit card companies and the banks who issue the cards have found a sneaky way to enrich themselves and help address the cost of their recent poor decisions — such as the subprime loans in the U.S. These new premium cards require merchants to pay considerably higher transaction fees. In some instances, the exact same credit card will have a higher merchant fee once it has been deemed "high spend."
The credit card companies have so complicated the way these fees are charged that it is nearly impossible for merchants to figure out exactly what they are paying to process transactions, until they get their bill. One Calgary business owner’s merchant charges rose by 28 per cent from May to June 2008, after the first round of changes was implemented. Her transaction fees increased 28 per cent in one month – a hike of more than $1,100 — on the same volume of business. In October, another round of fee increases were implemented. The upshot is, credit card companies will be making a lot more money and merchants will be footing the bill.
If Visa and MasterCard get into the debit card business in Canada, it will be even worse. In Canada, Interac has been operated as a co-operative venture among banks, credit unions, and other transaction providers to keep costs reasonable for both merchants and consumers. But it seems Visa and MasterCard want a share of the pie. In the U.S., the banks will issue a Visa or MasterCard branded card that allows customers to access their bank accounts, so it operates as a debit card rather than a credit card. The catch is the fees charged to merchants: rather than charge a flat rate (as Interac does for merchants now) Visa and MasterCard charge a rate calculated as a percentage, so the fee increases with the size of the transaction. For instance, on a $1,000 sale, a merchant might pay as little as 6.5 cents for the transaction under the Interac system; under the Visa and MasterCard percentage approach, this fee could increase to $6.50 — 100 times more.
Merchants are forbidden from passing along these fees directly to consumers. So they will have two options: They can stop accepting payment by debit or credit card or they can increase their prices across the board to cover the additional costs. In the U.S., fees such as this now add an estimated $427 in hidden costs to the average family’s annual household budget.
Consumers haven’t even requested this change — it’s been completely initiated by the credit card companies and Canada’s big banks. However, this battle is far from over. While the first rounds of new charges for premium cards are already in place, CFIB is pressing the federal government to review these changes and provide additional oversight to the credit card industry. In Australia, for example, the central bank regulated merchant fees to ensure they covered only the cost of providing the service along with a reasonable profit for the industry. As the 2009 federal budget announced a review to ensure there is proper disclosure for consumers on credit card fees and practices, ACTA and CFIB are calling on government to expand this review to include the pressures on business. This is likely only the opening salvo as the biggest fight is likely ahead. We strongly believe these unfair practices may be expanded to the debit card system in the near future.
CFIB invites all members of ACTA, to join the fight and sign the attached ”ALERT” which we will use in our efforts in Ottawa. We are pleased to report that, already, committees in both the Senate and House of Commons have agreed to review this pressing issue. ACTA is pleased to work with CFIB to ensure a fair credit and debit card system is in place for all merchants.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
