The hidden cost of credit cardsInteresting article today. I wonder how long it will take for the masses to switch (with encouragement from merchants) from traditional CC's to prepaid. Lets see now, prepaid is cheaper, safer, more convenient, less security hassles, what else ?
SteveSchreter of Montreal's J. Schreter Clothing says debit cards are "verysweet" from the retailer's perspective because of their low fees.
Photograph by: John Kenney, Montreal Gazette, Postmedia News, Montreal Gazette; Postmedia News
Steve Schreter is frustrated about the hidden fee he's forced to pay every time a customer buys merchandise with a credit card.
Unlikedebit-card purchases -which cost merchants an average flat rate of 12cents per transaction -credit card acceptance fees are calculated as apercentage of the purchase price paid to the merchant by the consumer.
"Adebit card is very sweet, from the merchant's point of view," the ownerof Montreal clothing store J. Schreter Inc. said in an interview. It'seasy to understand why Schreter and other merchants are sweet on debitcards. Typical creditcard merchant fees range from 1.5 to three per centof the purchase price. "Premium" credit-card transactions are even moreexpensive.
In the last five years, a growing number of Canadianconsumers have acquired these so-called premium cards -and merchants arefeeling the pain.
"Our members couldn't believe it," said RetailCouncil of Canada (RCC) head Diane Brisebois. "Members were gettingtheir bills at the end of the month and asking, 'What the hell ishappening? What happened to the regular credit cards?' "
Premiumcards offer users a range of attractive benefits -which can include cashrebates, air-mile points and reward points that can be redeemed forcatalogue items such as flat-screen TVs -but they stick merchants withhefty acceptance fees.
Thus, an item priced at $1,000 could cost amerchant more than $30 in fees if a customer pays with a premium card.But if the customer paid with a debit card, the merchant would only becharged 12 cents.
These differences can add up to thousands of dollars at the end of the month, which can be onerous for small-business owners.
Outragedthat Canada has among the highest merchant credit-card fees in theworld -nearly twice as high as in Europe, New Zealand and Australia -anumber of industry organizations, government agencies, consumer groupsand business owners are fighting back. In December, Canada's CompetitionBureau filed an application with the Competition Tribunal to strikedown certain rules that Visa Canada and MasterCard Canada impose onmerchants who accept their credit cards.
The bureau estimates that Canadian merchants pay $5 billion a year in credit card fees.
Therules challenged by the agency prevent merchants from eitherencouraging consumers to consider lower-cost payment options or fromapplying a surcharge to a purchase made with a high-cost card.Furthermore, once a merchant agrees to accept one of Visa orMasterCard's credit cards, that merchant must accept all cards offeredby that company, even if, like premium cards, they impose significantcosts on merchants.
The hidden fees result in higher prices forall consumers because merchants generally need to charge higher pricesto cover the increase in these expenses.
"The thing is, everybodyis paying for privileges that some people get with the premium cards,"said Martine Hebert, the Quebec head of the Canadian Federation ofIndependent Business (CFIB). "If companies want to give privileges, theyshould pay for it themselves."
Although Finance Minister JimFlaherty introduced a number of new credit-card regulations lastSeptember, Brisebois said these new rules have "done very little to stopthe abuse in pricing.
"We believe the minister should be putting regulations in place to control the credit-card merchant fees."
BrianWeiner, the head of strategy and interchange for Visa Canada, arguedthat his company receives only a small percentage of merchant acceptancefees.
Another small portion goes to acquirers, which are thecompanies that supply credit card network services to merchants. Thisincludes authorization and processing of credit card transactions, aswell as point-of-sale services, such as credit card terminals.
But80 per cent or more of what Visa or MasterCard charge merchants coversthe "interchange" fee paid to the banks or financial institutions thatissue the cards.
But even though credit card companies don'treceive revenue from the interchange fee, they do set the fee. And theyuse this interchange fee to woo banks and financial institutions toissue their cards.
That's the problem, Brisebois said. The lack ofcompetition in the market means that the only way credit card companiescan attract banks and financial institutions is to provide higher(interchange) fees to these customers, she explained.
"It doesn't make sense."