In what could be described as a very discrete press release, Visa Canada recently announced an agreement allowing merchants to impose checkout fees or surcharges on credit card transactions. A day later, MasterCard Canada made a similar announcement. The decisions were part of settlement agreements to resolve outstanding class action litigation involving a series of Canadian merchants. The implications of these decisions may disturb Canadian consumers and leaves consumer advocates with a series of unanswered questions.
Coming Soon: Merchants Ability to Charge Canadians Extra for Using Credit Cards
First, the good news – Canadians will not be subject to the possibility of merchant surcharges on credit cards transactions for at least 18 months. Moreover, the settlement agreements stipulate a merchant cannot impose a surcharge greater than the “maximum surcharge cap” that will effectively be 2.5% per transaction under current conditions.[i] This appears to be an attempt by Visa and MasterCard to prevent excessive surcharging by merchants that has been seen in other jurisdictions.
However, this development leaves PIAC with the following questions:
- Will the cardholder protections imposed by Visa and MasterCard be enough to prevent excessive merchant surcharging in Canadian sectors where payment by credit card is the only option, or the only convenient option?
- Who will enforce what is essentially Visa and MasterCard corporate policy in an effort to protect Canadian credit card users from overzealous merchant surcharging? Where will Canadians go for redress?
- Is there value to prohibiting Canadian merchants from imposing checkout fees on credit card payments before the conditions of the settlement agreements come into effect 18 months from now?
Organizations representing Canadian merchants such as the Canadian Federation of Independent Business (CFIB) and the Canadian Convenience Stores Association have indicated credit card surcharging is not expected to be widely used by smaller merchants.[ii] However, the introduction of surcharging on credit card payments has the potential to place consumers in a vulnerable position. The “trust me” argument does not fly very far given the consumer experience in other places where credit card surcharging by merchants has been allowed.
The Potential Implications of Merchant Surcharging for Credit Card Payments
There are a whole host of goods and services purchased by Canadians daily where payment by credit card is the only option, or the only convenient option. For instance, the majority of online transactions are paid for using a credit card. It is only natural that merchants in market sectors where credit cards are the dominant form of payment, such as airlines, event ticketing, travel agencies, car rental providers, shared economy platforms and online retailers, could recognize the lack of available payment alternatives and use surcharging as a revenue generator to the detriment of Canadian consumers.
In Australia, for example, evidence suggests that for a number of years, until late 2016, airlines were applying flat fee credit card surcharges that failed to reflect the actual cost of processing a credit card payment. According to a 2016 study by CHOICE, a leading consumer advocacy group in Australia, the Qantas $7 card surcharge on a flight was 348% higher than the cost of payment processing to the merchant, and Jetstar’s $8.50 surcharge represented a 1182% mark-up.[iii]
Airline mark-ups on credit card fees in Australia
|Airline||Ticket cost||Card payment fee||Likely average fee
incurred by merchant
Source: Kate Browne, Crackdown on sky high surcharges, CHOICE (2016)
There is evidence merchants in the United Kingdom also apply surcharges on credit card transactions beyond a regulated cap. UK merchants are regulated by Article 19 of the European Union’s Consumer Rights Directive which states merchants, “must not charge consumers, in respect of a given means of payment, fees that exceed the costs borne by the trader for the use of that means.”[iv]
However, in 2016, Richard Koch, head of policy at the UK Cards Association, indicated airlines, cinemas and travel agents may be charging more than they should to process credit card payments.[v] James Daley, managing director of consumer campaign group Fairer Finance, lamented, “There doesn’t seem to be anyone policing credit card charges. Nobody is stepping up to these companies and asking them why they apply a 3pc surcharge when others process cards transactions for free.”[vi]
As a result of the Australian and UK experience with merchant surcharging, as well as the tendency for Canadian airlines to apply many separate fees, PIAC expects it will only be a matter of time before a surcharge is applied by airlines to Canadians to process a credit card payment. Whether that surcharge respects the “maximum surcharge cap” of 2.5% per transaction imposed by Visa and MasterCard remains an open question. Perhaps the bigger question is if a Canadian airline or other merchant followed their Australian and UK counterparts and disregarded a suggested fee cap, what could or would anyone do to stop it?
Do Canadians Need to Live in a World With Merchant Surcharging?
The conditions of the class-action settlement agreements allowing merchant surcharges on credit card payments come into effect 18 months from now. Given the negative effect merchant surcharging on credit card payments has had for consumers in other jurisdictions, it may be prudent for the federal government to use that time to bring together relevant stakeholders, including consumer groups, to find a policy solution that avoids leaving Canadians subject to merchant surcharging.
Alternatively, the 18-month window provides provincial and federal governments time to weigh the merits of simply prohibiting Canadian merchants from imposing checkout fees on credit card payments. This would allow Canadian consumers to avoid the overcharging experiences of their UK and Australian counterparts.
The passage of legislation banning the application of a surcharge to credit card payments is not without precedent. As of March 2017, ten U.S. States had legislation in place that effectively prevents merchants from applying credit card surcharges to consumers.[vii] The passage of such legislation would allow the government brave enough to pass it an opportunity to present itself as a proactive defender of the pocketbook of its citizens.
Failure to act on behalf of Canadian consumers and allowing Canadian merchants to steal from the playbook of their UK and Australian counterparts in an unacceptable option. Albert Einstein once noted the definition of insanity was doing the same thing over and over again and expecting different results. PIAC implores policymakers to prevent the insanity of some merchants overcharging Canadians for credit card payments before it becomes a reality.
Jonathan Bishop has been a Research Analyst with the Public Interest Advocacy Centre (PIAC) since 2012.
[i] MasterCard International Incorporated, Canadian Credit Card Fees Class Action National Settlement Agreement, Schedule C, para. (e). See also Visa Canada Corporation, Canadian Credit Card Fees Class Action National Settlement Agreement, Schedule C, para. (e).
[ii] CFIB, CFIB commends Visa and Mastercard decision to allow merchants limited surcharging powers, (14 June 2017) Media Release. See Also Satinder Chera, “Is It Time To Cap Credit Card Fees?,” (27 June 2017) Huffington Post.
[iii] Browne, Kate, “Crackdown on Sky High Surcharges,” (22 February 2016) CHOICE.
[iv] United Kingdom (2013), Guidance on the Consumer Protection (Payment Surcharges) Regulations 2012, Department for Business, Innovation and Skills, page 6.
[v] Murray, Amelia, “E.U. ban on credit cards fees backfires – you’ll still pay 2.5 pc to spend,” (24 April 2016) The Telegraph.
[vi] Murray, Amelia, “E.U. ban on credit cards fees backfires – you’ll still pay 2.5 pc to spend,” (24 April 2016) The Telegraph.
[vii] Liptak, Adam, “Justices Side With Free-Speech Challenge to Credit Card Fees,” (29 March 2017) New York Times.