Contributing Author - Lyle Solomon, Principal Attorney
The holiday season is here! You have gifts to buy and joy to spread. But, unfortunately, the cost of giving may be a little much to bear for most Canadians.
The new credit card transaction or interchange fee is here, and as of October 6, 2022, Canadian retailers can add another 2.4% surcharge to your purchase and you may be liable for paying it on your next credit card swipe.
Here's everything you need to know about the fee.
What Is the Credit Card Interchange Fee in Canada?
Credit card processing fees or interchange fees in Canada is the amount businesses pay to credit card networks each time it accepts a credit card payment. This fee can vary with the type of credit card accepted.
- The fee to accept a Classic Visa card is 1.25%, while it's 0.92% for a basic Mastercard.
- The interchange fee of a premium Visa sits at approximately 2%. However, these fees can rise as much as 3%. As a rule of thumb, the higher the rewards, such as points or cash back, the higher the interchange fee.
Until October 6, 2022, only Canadian business owners were responsible for paying this fee. But now, the owners (except those in Quebec) can shift the liability onto the customers.
In other words, you may end up paying a surcharge on your next purchases.
The surcharge cannot be more than what the Merchant pays to the respective credit card networks. The surcharge amount is presently capped at 2.4%.
Companies that choose to charge the fees from their customers are legally required to disclose the processing fees clearly at their storefront entries and on websites if they do business online. The fee should also be specified as an itemized dollar amount on receipts.
If a chargeback is needed, the surcharge will be credited back to the customer.
Why Did the Fee Paying Responsibility Shift to the Customer?
In 2021, many Canadian business owners who accept credit cards filed a collective lawsuit against various payment processing corporations like VISA and MasterCard and a collection of banks.
The business owners cited the fees' prohibitively expensive and restrictive nature as the reason for the lawsuit.
With no rate cap set by the government, businesses have been forced to independently negotiate their rates with payment companies like Visa and MasterCard.
Thus, big businesses with the resources to negotiate end up with lower rates, while small companies don't. This has led to a squeezing of small businesses' already slim profit margins.
In response to the lawsuit, Mastercard and VISA agreed to allow Canadian business owners to pass the fee to their customers.
Hence, the customers are now caught in the crossfire of business owners and large corporations.
Only Mastercard and VISA card users may be liable for the new fees, as these two corporations were involved in the lawsuit. So, if you use an American Express card, you are out of scope for the time being.
How Will the New Law Affect How You Pay?
Most of you may already be paying extra for swiping your credit card, as most merchants pass on the credit card processing fee in their retail pricing, according to research conducted by the Bank of Canada research.
Thus, given the new law, businesses looking to make more profit can now add on the extra fees over their already inflated price, charging you twice for swiping your credit card.
It's also possible that business owners will slash the fees that they previously included in their price and charge the extra amount separately.
So, how much you pay will depend on the business.
The Good & Bad Side of the New Credit Card Fees
Although it's still early to say whether the overall effect will be positive or negative for consumers and businesses, there are some good and bad sides to this shift in liability that's clear.
The Good
You'll be able to make informed decisions on credit card use
Previously, most businesses embedded their interchange fees into their retail price. But, now, they can charge the fees separately from their customers, and they are liable to inform the customer clearly that they do so.
Thus, you can now appropriately account for your credit card usage cost and avoid it if you don't consider the benefits sufficient.
Consumers who use cash and debit cards won't need to pay extra
As most merchants include interchange fees in their prices, people who pay using cash and debit cards end up paying an additional charge for credit card facilities that they don't even use.
So, suppose such merchants charge the fees separately, informing the customers about it rather than hiding it in their price and reducing the previously inflated price. In that case, people who use cash and debit cards won't get charged extra.
The Bad
Businesses may impose the surcharge on top of their prices or continue raising their prices
Given the inflationary climate, businesses may impose a credit card surcharge on their already inflated prices to make more profit. For example, if you could previously spend $10,000 on brand new appliances, the cost of which likely included the fees, now you may need to pay an extra 2.4% or $240. Or, to avoid the scornful eyes of their customers due to the introduction of new fees, some businesses may simply increase their prices to make up for the credit card fees. As per the CFIB survey, 28% of businesses already increase their prices to cover credit card fees.
Credit card rewards will lose their potency
If you have a cash-back credit card, you can say goodbye to that luxury, as the processing fee will likely eat up the entirety or most of your reward. Say you earn 2% cash back on your card. But you get charged a 2.4% processing fee for using that card. As a result, you'll lose the totality of your cash-back to cover the processing fee plus 0.4%.
The fee will also detract from the value of the points or miles you earn on your card. Hence, for Canadian credit card holders earning more in rewards will be more challenging with the new fees.
Processing fees can get more costly if you carry a balance on a credit card
If you rely on your cards but don't pay off credit card debts in full every month, processing fees will increase your obligation.
For example: let's say you put the cost of those new $10,000 worth of appliances on your credit card and plan to pay the balance down over six months. If you are charged a processing fee, you'll generate interest on $10,240 — not $10,000. And the longer you take to pay your bill, the more interest you'll pay.
What Does the Future Hold?
Most merchants have yet to decide whether to charge their customers the extra fees separately.
According to the CFIB survey - 26% said they would charge processing fees from consumers separately if their competitors or suppliers do, 40% of small firms said they are still deciding, while 15% said they don't intend to do it.
The reason for such uncertainty is that most consumers won't readily support paying for credit card surcharges, especially if they are added to existing prices.
Telecommunications giant Telus, one of the larger businesses, planned to impose a 1.5% version of the credit card processing fee. But, the decision received a surge of customer complaints. Amid the backlash, the company put off its decision until early December.
According to the CFIB survey, credit card surcharges are more prevalent in the B2B sector than in the B2C sector.
Some B2C businesses do aim to charge new fees to consumers. However, they need to do it tactfully to bypass the wrath of their buyers.
Suggestion for B2C Businesses for Charging the New Credit Card Fee from Customers
For merchants, especially small scale, the power to surcharge will help them address their growing operating costs, insulate themselves against future credit card fee hikes and keep their prices competitive.
"With mounting pressures small businesses are facing due to inflation, surcharging is another way to reduce their cost burden," said CFIB president Dan Kelly.
However, businesses that want to shift the liability of the processing fee to their customer should reduce their prices before adding the surcharge. This is the right and fair way to do it, as most businesses already include the fees in their price.
Also, when customers see that a merchant has lowered their prices first, they are more likely to see a credit card surcharge as a fee for the business rather than an attempt by the business to turn more profit.
Can You Avoid the Fee?
"Credit card fees are embedded in the costs of everything that we buy because they're through merchants," Dan Kelly, Canadian Federation of Independent Business (CFIB) president, told CTV.
So, there's only a way to avoid it if merchants slash the fee embedded in their retail price and charge it separately from their customers.
If a merchant discloses that they take a surcharge, here are some things you can do to lessen the burden or avoid paying the interchange fees:
Change Spending Behaviours
The best way to lessen the load or avoid paying a surcharge is to stop using credit cards and switch to debit cards or cash.
Choose a Credit Card With No Annual Fee
High-reward or premium credit cards come with high fees, thus having a higher chance of the fees getting passed on to the consumers.
If you have a premium or high-reward credit card, you may need to decide if the rewards are worth it. This means looking at how much the points or cash back are worth in dollars.
You should also check to see if you're using the rewards. If not, switch to a credit card with fewer rewards and no annual fee. Should a no annual fee card be an option, there's always the possibility of moving towards a low interest rate card such as these ones.
Shop at Different Vendors
As merchants are supposed to disclose the fact, if they choose to pass on the fees to their customers, you can simply buy from somewhere else that doesn't charge interchange fees from customers.
Reduce Your Credit Card Use
It's hard to stop using credit cards all of a sudden. But you can only put on your credit card what you need.
Because of the change in how merchants will handle interchange fees and how hard it is to cut back on credit card use, consumers will have to be more aware of how they spend their money and decide how to use their cards in each situation.
Use the Buy Now Pay Later feature
The "buy now, pay later" option is an alternative payment method that more and more Canadian businesses are starting to offer. You can think of BNPL as a short-term installment loan with no interest. If you pay on time, it could be a viable alternative to using a credit card.
The Bottom Line
Whether the decision to shift the fee-paying liability to consumers when inflation is high and the holiday season is on a roll was right, only time will tell.
If merchants take the right path and reduce their inflated prices before imposing a surcharge, the decision will bring transparency to the system, giving more power to the consumers. However, if businesses view it as a profit-making opportunity, customers will likely lose the most.
In addition to using credit cards that have lower annual fees, you can also opt for prepaid cards. They are far more affordable for businesses to accept, and won’t be charged the 2.4% fee.
