The cost of doing business

When the Standing Senate Committee on Banking, Trade and Commerce released its report on Canada's credit and debit card systems on June 30, 2009, groups that lobby for small business were pleased. Three months earlier, the committee heard from business operators, lobby groups, financial institutions, the Competition Bureau, consumer groups, academics, Interac and Visa and MasterCard — among others.

Merchants face tough battle in trying to win over consumers in their fight over 'interchange' fees

When the Standing Senate Committee on Banking, Trade and Commerce released its report on Canada's credit and debit card systems on June 30, 2009, groups that lobby for small business were pleased.

Three months earlier, the committee heard from business operators, lobby groups, financial institutions, the Competition Bureau, consumer groups, academics, Interac and Visa and MasterCard — among others.

How we pay

  • Credit cards account for 31 per cent of transactions.
  • Cash accounts for 29 per cent of transactions.
  • Debit cards account for 26 per cent of transactions.

Source: Bank of Canada

The committee examined the fees and rates charged to merchants and consumers, the way credit card companies, banks and payment processors operate in Canada and whether that could or should change.

For months, the Retail Council of Canada had been complaining that a raft of new premium credit cards were driving up their cost of doing business. There were also concerns that Visa and MasterCard were preparing to enter the debit card business in Canada, which businesses feared would also drive up their costs as well as prices for consumers.

A voluntary code

On Nov. 19, 2009, Finance Minister Jim Flaherty unveiled a proposed voluntary code of conduct for the credit and debit card industry in Canada. Highlights include:

  • 90-day notice to merchants of any change in debit or credit card fees.
  • Merchants who accept credit card payments will not have to accept debit card payments from the same payment network, and vice versa.
  • Merchants can provide discounts for different payments methods.
  • A credit card cannot also be a debit card — and vice versa.
  • Premium credit cards can only be given to consumers if they ask for them.

The Canadian Federation of Independent Business welcomed the draft code, saying it "very closely resembles the Code"  it put forward in mid-2009.

The committee's report gave retailers — and other small business operators — a bit of a lift. Its recommendations included:

  • Establishment of an oversight board to make recommendations by Dec. 31, 2009 on any regulatory or legislative changes needed to ensure fairness in the debit and credit card payments systems.
  • Prohibiting financial institutions from forcing retailers to honour all cards, including higher-fee premium cards.
  • Requirement that the fees merchants have to pay when accepting debit cards for payments are based on a flat fee and not a percentage of the total sale.

Those recommendations echoed what the Canadian Federation of Independent Business has been asking of financial institutions.

Before the Senate hearings began, the federation's president — Catherine Swift — said, "Our members are not opposed to paying fees, but these costs need to reflect the services provided."

Rather than government regulation, the federation would like to see a credit card code of conduct for small business, including:

  • Premium cards should never be distributed without the request of a customer.
  • Merchants should know the total fee associated with a card before accepting it.
  • Merchants should be able to refuse any card or assess a fee for accepting it.
  • Merchants should be able to exit a contract without penalty if the terms change.
  • Credit card companies should commit to never introduce a "percentage of sale" fee should they enter the debit card marketplace.
The federation says unless there are significant changes to keep transaction fees in check, "some degree of regulation of the credit card industry may be necessary."

Retailers have been lobbying for more than a year to halt rising credit card fees and prevent American-style debit card fees from coming into Canada. The Retail Council of Canada took its "Stop sticking it to us" campaign to the web in September 2008 to raise public awareness. The council estimates credit card companies have "stuck Canadians" with almost $5 billion in hidden fees since it launched its website.

"The [Senate] Committee has clearly recognized that market forces alone aren't enough to defend us from the market dominance of the two major credit card companies and the banks," Diane J. Brisebois, president of the Retail Council of Canada said in a news release. "The Senators saw the need for government to confront abuse in the credit market, and to protect Canada's low-cost and efficient debit system. The coalition shares the Senate committee's view that government must move swiftly to protect consumers and merchants."

Merchant acceptance, costs, and perceptions of retail payments

  • All retailers accept cash, 93 per cent accept debit cards, 92 per cent accept credit cards.
  • In terms of annual gross revenue, credit cards represent 31 per cent of transactions, followed by cash (29 per cent) and debit cards (26 per cent).
  • Merchants prefer debit cards (53 per cent), followed by cash (39 per cent) and credit cards (5 per cent).
  • Debit cards rated least risky payment method.
  • Cash rated cheapest and most reliable.
  • Credit cards rated the most costly and least reliable.

Source: Bank of Canada

A similar campaign has been underway south of the border. argues that interchange fees — the fees merchants pay every time a customer uses a credit or debit card — "are toppling thousands of merchants and burdening millions of families." U.S. interchange fees were estimated at $48 billion in 2008. That's up from $42 billion in 2007 and 33 per cent higher than what they were in 2006.

Visa and MasterCard argue that their fees are fair — and transparent. They say the money goes to pay for an efficient and secure system of handling transactions. On its website, Visa notes that in Australia — where the government has capped the fees that credit card companies can charge for a transaction at 0.5 per cent — consumers have paid the price.

"Retailers have increased their profits," the company says, "while consumers have lost card benefits and choice. Consumers are also paying higher prices due to the check-out fees retailers can now charge."

The cost of taking retail payments in Canada (based on transaction of $36.50)

Cost item      
   Cash  Debit  Credit
Tender time  0.051  0.070  0.080
Deposit-reconciliation time  0.033  -  -
Deposit-preparation time  0.033  -  -
Deposit time at the bank  0.025  -  -
Payment-processing fee  -  0.120  0.730
Cash-deposit fee  0.078  -  -
Coin ordering  0.006  -  -
Theft/counterfeit risk  0.025  -  -
Chargeback  -  -  0.016
Float 0.006 0.001 0.001
Total $0.25 $0.19 $0.82

Source: Bank of Canada report: Merchants' cost of accepting means of payment: Is cash the least costly?

The two major credit card companies say Canadians will be well served if they expand their debit card services to this country. The advantages for consumers include:

  • MasterCard and Visa debit cards are accepted by merchants around the world. Interac cards have limited acceptance outside Canada.
  • Participation in Visa and MasterCard loyalty programs through debit purchases.

But retailers south of the border say the price will be ever increasing fees for merchants — with those costs leading to higher prices on store shelves.

A study released by the Federal Reserve Bank of Kansas City in December 2008 found that card companies earn much higher profits when their fees are set as a percentage of the total sale — as they are now for credit cards in Canada and credit and debit cards in the United States — rather than as a flat rate — as they are for debit cards in Canada.

The study further suggests it's merchants — and not consumers — who pay to fuel the card company's higher profits. There's no difference in the effect on consumers whether transactions fees are a flat rate or a percentage of the sale.

The Consumers' Association of Canada argues that the Australian experience of government-imposed price controls on the fees card companies charge merchants, harms consumers.

"We are pleased that the Committee did not accept the merchants' self-serving and hypocritical arguments in favour of price controls," association president Bruce Cran said.

Transaction fees around the world

  • United States: 2%
  • European Union: 0.3%
  • Australia: 0.5%
  • Canada credit card: 2%
  • Canada debit card: 19 cents per transaction

Cran adds that competition in the debit card market means more choice and convenience for consumers.

With the federal government recently tightening some of the rules surrounding clarity on credit cards and how interest is charged, consumers may be satisfied — and not that interested in the retail sector's fight over rising fees.