How does it feel to pay for someone else's travel reward points on their credit card? The Competition Bureau is claiming that's the current state of affairs in Canada.
Visa and Mastercard's merchant agreements are under scrutiny before a tribunal for the next five weeks amid claims they are anti-competitive. Currently, merchants can pay 1.5 per cent to more than 3 per cent in transaction fees to handle payments via credit cards. That's pretty stiff compared to the average flat fee of only 12 cents for an Interac debit fee.
Let's put that into context.
If you've ever bought something small at a convenience store, like a pack of gum, and didn't have cash on you, you may have resorted to paying with Interac. If that pack of gum is $1, a cash payment of $1 preserves the merchant's profit margin. But if you paid by debit, that extra 12 cents might make that a money-losing proposition. If you chose to pay with a credit card, the retailer is currently not allowed to charge an extra fee to cover the extra cost of payment processing.
You normally wouldn't pull out a credit card for a $1 purchase at a convenience store, but suppose you were buying a sofa valued at $1,000. Whether you pay with cash, Interac, or credit card, the cost to you is the same. But while the merchant absorbs only a 12-cent fee for Interac debit transactions, he or she has to absorb potentially $30 for handling a credit card transaction.
The Competition Bureau is suggesting that this increases the costs of doing business for merchants, who then must pass the cost to the consumer. So that $1,000 sofa might really have been closer to $970, but since so many people use credit cards, the extra costs associated with handling credit card payments affects those who don't pay with credit cards. Everyone pays the same amount, regardless of payment method.
But there's more to it than just that. As mentioned above, the merchants are not allowed to include a surcharge to credit card customers as a provision in their agreements with the credit card companies. This would have the effect of allowing retailers to offer that sofa at a regular price of $970 to cash and debit customers, and at $1,000 after a surcharge to credit card customers. This is currently allowed in Europe, but not here.
Further, these merchant agreements have an "honour all cards" policy, which states that if a merchant signs up with Visa and/or MasterCard, they are then obligated to accept every type of Visa and/or Mastercard as payment. The problem with this is that different cards have different transaction fees. A no-frills card might cost the retailer 1.5 per cent to process, but a rewards card that accumulates points good for travel might cost 3.0 per cent. And if a new card were to come out that offered 4 per cent cash back on all purchases, guess what? The fee might be 4 per cent or more.
So, in case you were wondering how credit card companies could offer travel rewards when you pay your balance off in full every month and no one collects interest from you, now you know. The Competition Bureau is alleging that the merchant has been forced to absorb that cost, whatever it might be, and they've been passing it on to the cash and debit customers too because they have to.
Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjee