In October, Canada began allowing merchants to surcharge up to 2.4% on Mastercard and Visa credit card transactions. This follows the settlement of a multi-million dollar class action lawsuit brought by Canadian merchants against Mastercard, Visa and various banks.

However, merchants are reluctant to introduce surcharges, fearing a backlash from their customers.

“The reason the number of merchants planning to overcharge is low is because companies in competitive industries like retail and hospitality don’t want to alienate consumers,” said Dan Kelly, president. of the Canadian Federation of Independent Business (CFIB), which represents small and medium independent businesses. “But monopolistic sectors with limited competition such as utilities, transportation and airlines will be early adopters of the surtax. Telus, one of the top three telecommunications companies in Canada, has already introduced the surtax on credit card.”

Overcharging is also unlikely among large merchants, according to Karl Littler, senior vice-president of public affairs at the Retail Council of Canada, which represents medium and large retailers. He sees the exchange – not the surcharge – as the main problem.

“The solution to the high interchange rates imposed by Mastercard and Visa is not the downstream approach of overcharging consumers, but the upstream approach of reducing interchanges,” Littler said.

However, trading smaller exchanges with card networks is more feasible for larger merchants due to their leverage with banks and processors. That’s why regulators have intervened in the European Union, the United Kingdom and Australia to reduce credit card swapping and limit or eliminate surcharges.

“The reason the number of merchants planning to overcharge is low is that businesses in competitive sectors like retail and hospitality don’t want to alienate consumers,” said Dan Kelly, president of the Canadian Federation. of independent business.

Credit card surcharges are capped at 0.5% in Australia and banned in the EU and UK. Mastercard and Visa credit card redemption is capped at 0.8% in Australia and 0.3% for UK and EU transactions. This compares to the average 1.4% interchange fee charged by Visa and Mastercard Canada under a voluntary agreement with the government.

“The problem is that because Mastercard and Visa Canada need to get the 1.4% average, they can lower interchange for large merchants, keep interchange high for [small and midsize ones]while getting the 1.4% average,” Kelly said.

Several major Canadian retailers have had battles with card networks. For example, in 2017, Walmart Canada had a dispute with Visa and temporarily stopped accepting Visa-branded credit cards. Other major Canadian retailers that have refused to accept Visa in their physical stores include No Frills and Costco, although they still accept Visa cards online.

Without regulation, small Canadian merchants lack the clout to negotiate lower interchange fees, but they also run into public opinion if they impose additional fees. Canadian media attention on the surcharge is currently quite active and the reaction appears to be overwhelmingly negative, according to Gilles Ubaghs, strategic adviser, commercial banking and payments at Boston-based consulting firm Aite-Novarica.

This contrasts with the United States, where a growing number of merchants have introduced credit card surcharges without significant consumer response. The supplements, presented in the form of a “discountto pay with cash rather than as a higher cost to pay with cards, are more common in businesses such as gas stations and restaurants, where prices have been particularly sensitive to inflation and chain issues supply is not ubiquitous.

“At a time of high inflation and growing price sensitivity, there’s no worse time to add a 2% price hike,” Ubaghs said. “The consumer backlash could be high. Along with credit card rewards points, many consumers rely on credit cards to manage their personal cash. It’s easy to imagine how the surcharge will be seen as a price hike for already exhausted consumers.”

Surcharges for online purchases by credit card could inconvenience consumers who have no other means of online payment at lower cost. Canadian debit cards can be dual-badged with Interac, the country’s debit card network, and Mastercard or Visa. Interac-only debit cards can only be used online if loaded into Apple Pay or Google Pay wallets and online merchants accept those wallets.

“The problem is that not all Interac cards are dual-badged,” Ubaghs said. “Using debit cards for online or in-app payments is not always an option for Canadian consumers. If some customers have no choice but e-commerce credit cards and are hit with surcharges, the backlash could be negative.

The regulations require businesses to make it very clear upfront, including window signage, that they are overcharging for credit card payments. “It’s not that far to say ‘cash or debit only’. Highly competitive merchant segments like cafes would be reluctant to do that,” Ubaghs said.

This attitude was reflected in a September 2022 member survey by CFIB, which found that only 19% of respondents plan to introduce additional fees, while 26% would if their competitors or suppliers did. . Of the rest, 40% don’t yet know if they will charge extra fees, while 15% have no intention of doing so, CFIB found.

The Canadian government wants to reduce credit card swapping and protect cardholder rewards, said Adrienne Vaupshas, ​​press secretary in the Office of the Deputy Prime Minister and Minister of Finance. “The government is committed to reducing the cost of credit card fees in a way that benefits small businesses and protects existing rewards points for consumers,” she said.

However, the government currently does not have the power to regulate card acceptance fees in the same way as the EU and Australia. Canada’s Payment Card Networks Act only allows the government to regulate card networks’ fair and transparent business practices, such as online posting of network fees and interchange rates and advance notification of changes rate.

Despite commitments in its 2019 and 2021 budgets to reduce credit card fees charged to merchants, the government has so far failed to introduce the necessary legislation.

In August 2021, the Department of Finance launched an ongoing consultation with Canadian small business owners and other stakeholders on reducing the average overall cost of interchange fees. In a statement on its website, the Department of Finance said the government was prepared to consider legislative changes to the Payment Card Networks Act that would provide authority to regulate interchange fees.

It will be difficult for the government to introduce legislation that reduces trade for small businesses while protecting rewards, Kelly said.

“Canadians are addicted to their credit card reward programs, but don’t want to pay for them through surcharges,” Kelly said. “Consumers don’t realize they’re paying interchange fees built into everything they buy. They think their credit card rewards are funded by their annual membership fees or by the interest they pay to their issuers, when their rewards are actually funded through interchange.”

According to Kelly, Canadians are willing to pay a fee as long as the fee is hidden and they don’t have to hear about it. “But they get mad when they realize they’re paying extra to fund a rewards program for air travel that they won’t be doing,” he said.

According to Alex Vronces, chief executive of the nonprofit Paytechs of Canada, whether or not consumers opt for cheaper payment methods will depend on individual consumers and their credit card. “If I get 3% cashback on groceries, but my groceries surcharges 1.5%, I still earn using my credit card,” he said.

Before surcharges were banned in 2018, surcharges were popular with UK airlines and holiday companies. UK consumers were facing surcharges for using credit cards and getting not only rewards and extra payment terms, but also additional consumer protections such as flight cancellations, or waiver to all of this and seeing money leave their account instantly after paying by debit, said Zil Bareisis, head of retail banking at Boston-based consulting firm Celent.

“In Australia, not only is card surcharge completely pervasive, but banks and card companies have recouped all lost revenue due to declining interchange by introducing additional fees and charges for cardholders and reducing credit card airline rewards significantly,” said Grant Halverson, managing director of Melbourne, Australian consultancy McLean Roche. “Consumers have lost a lot.”