First it was premium credit cards with their higher processing fees gouging small businesses, then the announcement that Visa Canada will hike its card processing fees by one-third in April 2013 and introduce an "uber-premium" credit card in the fall, and as of this writing, an announcement that MasterCard Canada will follow suit and raise merchant transaction fees by 20 percent on July 1, 2013.What a coincidence, as Canadian Federation of Independent Business (CFIB) president and CEO Dan Kelly points out, "that both major card brands are increasing their fees just before Canada's Competition Tribunal is expected to rule on its case against the two card giants."
This article explains:
- How Credit card transaction fees, especially the higher fee rates associated with premium credit cards, hurt Canadian small businesses;
- What the Canadian Competition Bureau, the Canadian Federation of Independent Business (CFIB) and other business groups are doing about the problem;
- What your small business can do to mitigate the damage of escalating credit card transaction fees.
The Problem With Premium Credit Cards
All credit cards are more expensive payment methods for merchants than other forms of payment such as debit cards and cash. But credit card companies have been relentlessly creating more varieties of their credit cards.
These 'premium' cards sometimes offer rewards to consumers but punish small businesses because credit card companies charge merchants even higher fees when customers use premium credit cards than when they use 'regular' ones.
The Canadian Federation of Independent Business (CFIB) has put together a credit card rate chart that lists many of the specific types of credit cards available in Canada.
Looking at the list you'll see, for example, that the transaction fee charged a merchant when a customer uses a regular MasterCard is 1.75 percent, but if a customer uses a MasterCard Premium High Spend card, the transaction fee is 2.71 percent. Some MasterCards in the World/World Elite category carry even higher transaction fees.
To a small business that processed $100,000 worth of credit card transactions each month, the .96 percentage difference charged for premium card transactions would cost an additional $960 a month, an extra $11,520 per year.
I've used MasterCard rates as an example but I could have just as easily picked Visa; Visa transaction rates follow the same model of premium cards being used to extract higher transaction fees from merchants.
And credit companies have been pumping out premium credit cards. "There are a staggering number of cards on the market today in Canada, with over 200 MasterCard and Visa cards on our rate chart alone," says Dan Kelly, president and CEO of the CFIB.
Having actively lobbied to get a Code of Conduct for the Credit and Debit Card Industry in Canada in place, the CFIB is now pushing for amendments to the Code that would allow merchants to accept lower cost cards from one brand without the requirement to accept higher cost 'premium' cards or to surcharge for accepting higher cost cards.
The Federation would also like all higher cost credit cards to be required to be separately branded as 'premium' as most consumers still do not know that some credit cards charge extra fees for merchants.
The CFIB is also pushing for new rules to be added about mobile payments.
The Case Before the Competition Tribunal
Meanwhile, the Competition Bureau of Canada has taken Visa and MasterCard to court.
The Competition Tribunal "is a strictly adjudicative body that operates independently of any government department" that hears cases dealing with economic and business matters such as mergers, misleading advertising and restrictive trade practices (or, in other words, cases dealing with matters arising from the Competition Act).
(Note that the Competition Tribunal is separate from the Competition Bureau, which is the independent agency which enforces the Competition Act. The Competition Bureau is the agency that investigates complaints and sends them on to be heard by the Competition Tribunal if needed.)
The argument before the Competition Tribunal is that Visa and MasterCard are engaging in anti-competitive behavior and their restrictive contracts allow the two credit card companies to essentially dictate terms to merchants (an argument that certainly doesn't sound farfetched to me when you consider that Visa and MasterCard make up 92 percent of the Canada credit card market, handling about $322 billion of credit card transactions in 2011).
These terms allow Visa and MasterCard to charge transaction fees of over three percent in some cases, fees that, according to the Competition Bureau, are among the highest in the world and rake in $5 billion for the credit card industry each year.
The Competition Tribunal doesn’t have the power to levy a monetary judgment against the two credit card giants but it could force them to change their operating methods.
The Competition Bureau wants retailers to be able to do two things they’re currently not allowed to do:
- refuse to accept high-cost credit cards but still accept others from the same brand name.
- add surcharges to counteract the higher transaction fees charged for premium credit cards. Will this happen?
Developments south of the border give reason for optimism: in July 2012, Visa and MasterCard (along with several major banks) settled a long-running lawsuit that alleged the card issuers conspired to fix retail transaction fees. Visa, MasterCard and the aforementioned banks agreed to pay U.S. retailers at least $6 billion USD.
Perhaps even more encouragingly, the terms of the settlement allow U.S. retailers the right to charge their customers more if they pay with credit cards.
What Can You Do as a Small Business Owner?
1) Familiarize yourself with the Code of Conduct for the Credit and Debit Card Industry in Canada.
Both Visa Canada and MasterCard Canada have agreed to comply with this voluntary Code of Conduct introduced by the Minister of Finance on May 17, 2010.
If you have a complaint about a potential violation, you can contact the Financial Consumer Agency of Canada which will determine whether or not the credit card company is in compliance.
You should also read their document What Does the Code Mean for Merchants?
2) Educate your customers about the problem.
Most consumers don't give much thought to credit card transaction fees and are not aware that some credit cards cost much more per transaction than others. Ask your customers to consider paying by cash or debit instead and let them know about the problem with premium credit cards and higher transaction fees.
The CFIB has put together some customer request signage that you can download and post by your cash register(s).
The Competition Tribunal's Decision
Dateline July 23, 2013 - The Competition Tribunal has decided the case against the higher merchant fees of premium credit cards is unfounded.
While the case was actually dismissed on a technicality, the Tribunal did look at the case and said that it would have declined to issue an order and noted that the proper solution to the concerns raised by the Commissioner is a regulatory framework.
Competition Bureau commissioner Jon Pecman said in a statement that the bureau is very disappointed with the tribunal’s decision and that “We will be reviewing the decision closely to determine our next steps.”
The Consumers’ Association of Canada is "ecstatic" about the decision, claiming that it's a huge win for consumers.
MasterCard and Visa, as you would expect, fall into the ecstatic camp; both companies immediately issued statements praising the decision.
On the other hand, Dan Kelly, president of the Canadian Federation of Independent Business, calls the decision a big loss for Canadian merchants and vows to fight on.
The Retail Council of Canada is also disappointed. "Canadians are paying more than they should be at the register because of these high fees," retail council spokesperson David Wilkes said. "Totalling more than $6 billion annually, these fees have a negative effect on merchants and consumers alike" (CBC News).
For the time being, if your Canadian small business accepts credit cards, you have to accept whatever Visa or MasterCard your customer presents as payment, whether it's a premium card with higher transaction fees or not and are not allowed to add a surcharge to help cover the cost.