Credit card fees are unfair, tribunal hears

The fees that Canadian merchants are charged to process credit card transactions are among the highest in the world, a federal Competition Bureau tribunal heard Tuesday.

Kent Thomson, the lead counsel for Canada's competition watchdog, told the tribunal in Ottawa on Tuesday that the system of fees charged when retailers allow consumers to pay with credit cards goes against competition rules and add up to $5 billion in fees for the credit card industry annually.

Thomson described Canada's credit card system as a "perverse" place where shoppers who pay with cash or debit subsidize purchases made with credit cards because merchants pay high fees for accepting credit cards and those costs are passed on to all consumers.

Thomson's arguments opened the case by bureau staff alleging Visa and MasterCard are engaging in anti-competitive behaviour.

Under the current system, credit card companies charge fees sometimes in excess of three per cent to process credit transactions. Consumers, thus far, don't pay those charges directly, but retailers say the fees on some premium credit cards are becoming exorbitant and eating into their thin profit margins.

Retailers have lobbied for permission to tack a surcharge on purchases, so customers would be more aware of the costs. But the contracts offered by the major credit firms prohibit any such surcharges. They also forbid retailers from selectively accepting only credit cards from the same company with lower fees and denying customers with so-called premium cards.

Those fees add up. A customer in Ontario who buys a set of snow tires in Ontario that cost $400 would pay $452 after taxes, regardless of the payment method.

And Canadian taxpayers foot the bill, too. In question period today, the opposition asked Finance Minister Jim Flaherty about $60 million spent over five years in government credit card fees.

The government said it has developed a code of conduct for the credit card companies with the support of consumer associations and the Canadian Federation of Independent Business, and that "there has been general compliance," although Ottawa has had a "couple of instances" where it had to act on violations.

If the customer used a debit card, that retailer would pay 12 cents to a payment firm such as Interac to process the transaction. But if the customer used a premium credit card, the retailer would have to pay $12 to process that same transaction — more than 100 times the cost of the debit transaction.

It has been estimated that Canadians pay $5 billion a year in hidden credit card fees, putting them among the highest in the world and making the industry a natural target for federal competition commissioner Melanie Aitken, who referred the case to the tribunal in 2010.

Visa and MasterCard were expected to issue their opening statements later Tuesday afternoon, but Visa issued a statement denying the charge, saying the policy against a surcharge ensures customers are not "unfairly penalized" for using whatever card they choose.

The tribunal has the power to force credit card companies to change their method of operations, but cannot levy a monetary penalty in the case.

In 2009, a group representing independent business owners asked the competition bureau to investigate suspicions that Canada's major credit card companies were engaged in price fixing.

At the time, Corinne Pohlmann, director of national affairs for the Canadian Federation of Independent Business, asked why Visa and MasterCard announced fee hikes within a month of each other in June and July 2009.

"Is this just a coincidence, or was there actually some discussions between the two of them?" she asked.

"Visa and MasterCard's anti-competitive behaviour hurts businesses and consumers alike," Aitken said in December 2010 when the bureau referred the case to the tribunal.

"We initiated our investigation in response to concerns raised by merchants and their associations regarding substantial increases in the fees that merchants pay for credit card acceptance," she told a meeting of the Canadian Bar Association last October.

Credit card companies typically charge businesses between 1.5 per cent and three per cent of the customer's total transaction, but the "no-surcharge" rule prevents them from tacking on a surcharge to offset the extra amount.

The credit card companies have argued that if businesses were forced to charge a fee for use, it would result in a form of discrimination against credit card holders, who would have to pay more for using the cards.

Ninety-two per cent of all credit card transactions in Canada are handled by Visa or MasterCard, adding up to about $322 billion in 2011.

On average, the rates that Canadian cards charge retailers are nearly twice as much as those charged to retailers in Europe, New Zealand and Australia, the Competition Bureau says, but still less than the rates charged in the U.S.

According to a December, 2011 consumer survey conducted by the Consumers' Association of Canada, 84 per cent of Canadian consumers oppose merchants’ ability to surcharge when they choose to pay by credit card and 90 per cent believe they should have the right to choose their preferred payment method, Visa noted.

The bureau first brought its application to the quasi-judicial tribunal in December 2010 with a challenge under the price maintenance provisions of the Competition Act, which allows the Competition Tribunal to prohibit certain agreements or contracts that influence prices upward or discourages the reduction of prices.

The tribunal is expected to continue until the end of June.