SMALL BUSINESS

Dianne Buckner

Behind the scenes of the credit card brouhaha

Last Updated: Tuesday, December 21, 2010 | 3:39 PM ET

By Dianne Buckner, CBC News

Could this be the last holiday season that credit card payments work the way they do now in Canada? If the Competition Bureau has its way, not only would merchants pay less to Visa and MasterCard, but Canadian consumers might see some lower prices as well.

Last week the Competition Bureau announced it's attempting to strike down some of the requirements written into the contract agreements between credit card companies and Canadian vendors. Merchants pay fees to the credit card companies — typically between 1.5 and three per cent of every purchase — for the ability to accept customers' payments via plastic.

But according to the Canadian competition watchdog, something fishy is going on. Visa and MasterCard's "anti-competitive behaviour … is particularly harmful for small and medium-sized businesses, key engines for economic growth in Canada," Melanie Aitken, the commissioner of competition, said in a news release issued by the bureau.

The bureau isn't challenging the fees themselves. Most merchants pay them without question, knowing Visa and MasterCard offer a valuable service and have built and maintain extensive networks to facilitate payments.

But the bureau is concerned about that what it calls “merchant restraints” in the credit card agreements. It says these restraints “prohibit” merchants from encouraging customers to pay with cash or debit card in an effort to reduce the card acceptance fees they pay to the credit card companies. Visa and MasterCard disagree, saying there’s nothing in their policies to prevent retailers from offering “discounts” to consumers who pay cash or debit.

Some vendors do offer that kind of price discounting and even advertise those discounts. Vendors I contacted this week didn't want to talk — perhaps they’re unsure if the practice could indeed put them in breach of their signed agreements with the credit card companies and are loathe to draw any more attention to it.

Premium cards

Nor does the bureau like the fact that merchants can't decline the new "premium" cards those companies have introduced, such as the Visa Infinite or the MasterCard World Elite.

The credit card companies charge merchants higher fees when customers use those cards, on the premise that people with higher incomes qualify for the cards and are therefore more valuable customers. Visa or Mastercard may not have done anything to bring in those customers, or to "earn" the higher fees, but theoretically, the premium cards are a way for merchants to identify wealthier customers — if that's a business benefit.

And business owners looking to minimize their credit card acceptance fees are not supposed to ask such customers, "Could you pay with a regular Visa or MasterCard, instead of this premium card?"

The extra charges relating to premium cards are piling up.

"Initially, we were told that only two to five per cent of high-end customers would be using those premium cards," says Dan Kelly of the Canadian Federation of Independent Business. "Now it's gone up to about 30 per cent."

The premium cards give consumers additional insurance options and travel opportunities, but as their popularity grows, so do the additional fees charged to vendors both large and small.

Premium cards aren't the only problem, as the Competition Bureau sees it. There's also the fact many retailers end up boosting their prices slightly to help cover the cost of credit card acceptance fees. The bureau's written submission to the Competition Tribunal points out that in 2009, merchants in Canada paid approximately $5 billion in card acceptance fees, among the highest credit card fees in the world.

"Many countries have taken steps to reduce the fees paid by merchants," says the official statement from the bureau, noting the fees here are nearly twice as high as what merchants pay in Europe, New Zealand and Australia, although slightly less than in the United States.

Pointing fingers

Boil it all down, and it appears that everyone — even people who pay cash or debit for their purchases — are paying slightly higher prices because of credit card acceptance fees.

But whose fault is that?

Last week's move by the Competition Bureau set off a spirited round of finger-pointing. No sooner did the complaint hit the front pages, than Visa and MasterCard were directing attention back to the misguided efforts of the bureau.

"Competition Bureau Lawsuit Will Unintentionally Punish Consumers, Enrich Large Retailers," ran the headline on Visa's news release. (Note that Visa played the "size card." It's "large" retailers that will be enriched! Never mind the small ones that might engender some empathy).

Then the Consumers Association of Canada weighed in to point its finger at retailers. The CAC focused on the fact the bureau's submission refers to a merchant's inability to put a "surcharge" on a customer's bill to recoup the card acceptance fee, meaning the fees are "hidden."

"Canadians are overwhelmingly opposed to the suggestion that they should have to pay merchants for the privilege of paying them," says Bruce Cran, president of the CAC. "It is unfortunate that the merchants are now trying to reopen that debate."

I thought the Competition Bureau had reopened the debate.

One interesting detail in this brouhaha is the fact that Visa and MasterCard don't actually reap the biggest benefit from these disputed fees. The largest share of the card acceptance fee, 80 per cent, goes to the issuer of the card, a.k.a. the banks. I find it surprising that no one seems to be lining up for a shot at those usually popular whipping boys (and girls). Visa, MasterCard, and retailers are all being cast as greedy villains, but maybe now that our banks are the envy of the world's financial system, they're beyond reproach on any front.

But never mind the finger-pointing and the legalities — Dan Kelly at the CFIB wonders if a revolt might be brewing.

"If even a handful of merchants were angry enough that they turned down premium cards for even a short time, my guess is that we would see a completely different structure on the credit card side very quickly," he says.

He suspects that one reason the credit card companies are reacting so strongly to the bureau's challenge is because, "they are freaked out by even the possibility that merchants could have these powers."

It will be fascinating to watch this one play out.