The price of premium credit cards

For more than 40 years, credit card companies have collected fees on
sales because they can offer consumers and merchants the value of
convenience.

For more than 40 years, credit card companies have collected fees on sales because they can offer consumers and merchants the value of convenience. Consumers may gripe about high interest rates while watching their credit card balances grow, and merchants may complain about how much passive income credit cards companies are amassing, but in the end, consumers don’t have to worry about having enough cash on hand, and merchants benefit from the credit cards’ ability to facilitate impulse buying and to make it easier to upsell.

Over the decades, credit card fees may have stayed relatively stable, but in the last three years, the fees connected to premium credit cards have nearly doubled. Merchants can’t refuse to accept the premium Visa, MasterCard and American Express cards, and their contract doesn’t allow them to pass on the fees to consumers, a practice known as “surcharging,” ostensibly because it reflects poorly on credit card companies.

“You have no choice,” says Heather Holbrook, who owns Isabel’s Cupcakes in Ottawa. “If you refuse their card, you’ll lose a customer.”

“If you refuse to take the premium card, you can’t take the regular card, and you can’t really do that because you risk losing the sale,” says Dan Kelly, president and CEO of the Canadian Federation of Independent Business (CFIB). “But the [potential] power to surcharge keeps credit card executives up at night,” says Kelly, “because it would give merchants the power to push back.”

Kelly doesn’t believe merchants would use it often, because they don’t want to make their customers pay more, “but it would level the playing field.”

“Surcharging is just a way for merchants to pad their profits,” says Bruce Cran, president of the Consumers Association of Canada (CAC). He opposes surcharging based on the Australian model, which permitted surcharging in relation to premium credit card fees for the last 15 years. In his view, surcharging is responsible for the 10 per cent hike the taxi industry charges. “The airline industry is another sector that loves to jump on the surcharge,” he adds.

For a further bite out of the bottom line, fees are calculated on top of the taxes merchants are obliged to collect for the government. And in the case of foodservice, where the customer has added a gratuity to the bill, the charges are calculated on top of that amount as well, with the merchant paying fees on top of nearly 30 per cent of the sale, not a penny of which is even a sale of goods or services.

“It adds insult to injury,” says Garth Whyte, president and CEO of the Canadian Restaurant and Foodservices Association (CRFA). He describes this fee collection as “raising costs by stealth.” Whyte adds that a lot of his members don’t even know their costs until they get their bills.

“The credit card industry is incredibly opaque,” says Kelly. “It’s one of the murkiest industries in Canada.” As a counter measure in 2010, Kelly helped marshal the creation of a voluntary Code of Conduct about fair competition practices for the credit and debit card industry, hoping to help increase transparency around fees, for the protection of both business and consumers.

As a voluntary code, it’s limited, but it did lead to presenting the issue as a complaint to the Competition Bureau of Canada in December of that year. The bureau investigated the merit of the complaint and decided it was a valid issue to be heard by the Competition Tribunal. For nearly two years, the tribunal took statements from industry experts, advocates, credit card companies and banks, including surprising requests by banking lawyers to redact some banking information to regain some corporate secrecy for their clients.

The results of those specific requests are pending, and at the time of this writing, the tribunal has not made any decision on the competition constraints Visa and MasterCard still hold over merchants. The progress of the case can be found at www.ct-tc.gc.ca, under case number CT-2010-010. The last word from the tribunal is its declaration on March 7, 2012, that the final arguments would wrap up on June 21, 2012 – over a year ago.

Although the tribunal is an independent, non-governmental body, the Stephen Harper government is also getting a taste of this issue. Bill S-215, which is about credit card fees, is approaching its second reading in the Senate. Federal NDP Finance Glenn Thibeault is working on strategies for introducing a private member’s bill for the House of Commons the end of this year.

Kelly has also developed a point of sale poster to bring attention to how much merchants are paying out to credit card companies, and to encourage people to use debit – which requires a flat and economical rate – but many owners don’t want to put negative messaging out there. Also, not everyone is behind educating the public. Says Holbrook: “People are here to buy stuff and leave, not to hear my problems.”

Linda Kearney owns Dauhpine Bakery in Edmonton. She started her business as a cash-only operation working farmers markets, a practice she continues today. But when she opened her bricks-and-mortar store about two-and-a-half years ago, she was forced to accept all cards, and to pay a price she didn’t foresee. “We didn’t put it into our start-up business plan,” and now, says Kearney, “we pay the equivalent of one person’s salary in credit card fees, and that’s out of a staff of eight.” Fifty per cent of her sales are handled by credit card sales.

Kearney says she will spend the next few months canvassing her customers to find out how important using credit cards are to them and whether or not she would lose their business if she decided to go cash-or-debit-only. She says her customers are more educated than most, more likely to appreciate the artisan nature of her business and more willing to pay her higher than average prices.

“We’re afraid to take the risk [of not accepting cards], but black Amex rates, for example, are so exorbitant, that we don’t make any profit on that sale,” says Kearney, essentially making a sale for free.

On the other hand, Kelly is optimistic: “People are fond of their local merchants. They know they’re working 70 to 80 hours a week. Often, consumers are very supportive.” 

How powerful could merchants be if they banded together? Last August, a U.S. class action suit forced Visa and MasterCard to pay retailers US $7.25 billion in cash and to temporarily reduce fees. Economists calculate that Canadian retailers paid out from $5 to $8 billion dollars to credit card companies last year.

In any other sector, that kind of spending affords a lot of market and negotiating clout, but not when it comes to credit cards.

Whyte says his role is to keep applying pressure.

“We won’t quit and we won’t go away,” he says. On May 1, Whyte and the CRFA succeeded in winning a new dairy classification for mozzarella cheese to be used in fresh pizza making, which will help bring more fair pricing for foodservice operations, better in line for the lower prices paid by frozen pizza manufacturers. It took 15 years. “It’s never done until it’s done,” says Whyte, referring to agreements that needed to be signed by all provinces and territories. And still, it got done.

Stephanie Ortenzi (www.pistachiowriting.com ) is a Toronto-based food marketing writer.