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 method of payment used by Canadians may be influenced by the possibility of merchant surcharges on credit cards transactions. Photo courtesy of Steve Buissinne.

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

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?
 

It is possible merchants in market sectors where credit cards are the dominant form of payment, such as airlines, event ticketing and online retailers, could use surcharging as a revenue generator to the detriment of Canadian consumers. Photo courtesy of Mateusz Dach.

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.

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• The Ontario Ministry of Government and Consumers Services can be reached by clicking here.
• Here is a list of Members of Provincial Parliament

Make sure the Government of Ontario follows through on its plan to consult and to develop regulations aimed at protecting consumers’ loyalty points.
 
Jonathan Bishop has been a Research Analyst with the Public Interest Advocacy Centre (PIAC) since 2012. He is the author of PIAC’s 2013 study of customer loyalty programs in Canada entitled, “Customer Loyalty Programs: Are Rules Needed? The report noted consumers have little recourse when loyalty program providers unilaterally decide to devalue their loyalty currency, or change other terms and conditions of loyalty programs. PIAC advocated for industry-wide guidelines relating to loyalty currency devaluation, transfers and bequeathal. Moreover, the report called for the creation of a complaints body for consumers on issues that arise relating to the operation of loyalty programs, as well as guidelines for the notice given to changes in loyalty program terms and conditions.

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• Taking some of their loyalty currency away
• Making the redemption process a less than pleasant experience

PIAC contends the redemption process is critical for both consumers and loyalty program providers – a positive redemption of loyalty points may lead customers to become brand advocates for the program. A negative redemption process leaves consumers alienated, which is the risk Air Miles increasing faces as its points expiration policy inches closer to reality.
 
How Can Air Miles Respond?
A simple yet effective response would be for Air Miles to simply employ more staff at their call centre to address the excess demand. Air Miles could follow the lead of Aeroplan by cancelling the expiry policy before it takes effect December 31, 2016. However, assuming Air Miles remains committed to having their miles expire, here are a couple of suggestions to remove some of the public relations sting out of the collective frustration experienced by their Canadian customers. Air Miles stands to gain by having millions of Air Miles expire each year going forward. Each expiring Air Mile represents an outstanding liability removed from its books. In response, Air Miles could take a percentage of expiring Air Miles and donate them to any number of the thousands of registered charities operating in Canada. Alternatively, Air Miles could establish an “Air Miles Charity Bank” where organizations could submit short applications for Air Miles to further their charitable activities, fueled by expired Air Miles.
These suggestions allow Air Miles to create new beginnings out of a story that so far has only grown a bumper crop of consumer frustration.
 
Jonathan Bishop has been a Research Analyst with the Public Interest Advocacy Centre (PIAC) since 2012. 
PIAC explored the operation of customer loyalty programs in Canada in 2013, noting consumers have little recourse when loyalty program providers unilaterally decide to devalue their loyalty currency, or change other terms and conditions of loyalty programs. PIAC advocated for industry-wide guidelines relating to loyalty currency devaluation, transfers and bequeathal. Moreover, the report entitled, “Customer Loyalty Programs: Are Rules Needed?”, called for the creation of a complaints body for consumers on issues that arise relating to the operation of loyalty programs, as well as guidelines for the notice given to changes in loyalty program terms and conditions.
 

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