In October, Canada began allowing merchants to surcharge up to 2.4% on Mastercard and Visa credit card transactions. This follows the settlement of a multimillion-dollar class action by Canadian merchants against Mastercard, Visa and various banks.
However, merchants are hesitant to introduce surcharges, fearing a backlash from their customers.
"The reason why the number of merchants planning to surcharge is low is because businesses in competitive sectors such as retail and hospitality don't want to alienate consumers," said Dan Kelly, president of the Canadian Federation of Independent Business (CFIB), which represents independently owned small and medium-sized merchants. "But monopolistic sectors with limited competition such as utilities, transport and airlines will be early adopters of surcharging. Telus, one of Canada's top three telcos, has already introduced credit card surcharging."
Surcharging is unlikely at large merchants as well, according to Karl Littler, senior vice president of public affairs at the Retail Council of Canada, which represents medium and large retailers. He sees interchange — not surcharging — as the main issue.
"The solution to high interchange rates imposed by Mastercard and Visa isn't the downstream approach of surcharging consumers, but the upstream approach of cutting interchange," Littler said.
However, negotiating lower interchange with card networks is more feasible for larger merchants because of their clout with banks and processors. This is why regulators intervened in the European Union, the U.K. and Australia to reduce credit card interchange and limit or eliminate surcharging.
Credit card surcharges are capped at 0.5% in Australia and banned in the European Union and the U.K. Mastercard and Visa's credit card interchange is capped at 0.8% in Australia and at 0.3% for transactions within the U.K. and the EU. This compares with an average interchange fee of 1.4% charged by Visa and Mastercard Canada under a voluntary agreement with the government.
"The problem is that, as Mastercard and Visa Canada have to obtain the average of 1.4%, they can lower interchange for big merchants, keep interchange high for [small and midsize ones], and still get the 1.4% average," Kelly said.
Several major Canadian retailers have had battles with the card networks. For example, in 2017 Walmart Canada had a dispute with Visa and temporarily stopped accepting Visa-branded credit cards. Other large Canadian retailers which have declined to accept Visa in their brick-and-mortar stores include No Frills and Costco, though they still accept Visa cards online.
In the absence of regulation, smaller Canadian merchants lack the leverage to negotiate lower interchange fees, but they are also up against public opinion if they do surcharge. Canadian media attention on surcharging is pretty active currently and the reaction seems to be overwhelmingly negative, according to Gilles Ubaghs, strategic advisor, commercial banking and payments at Aite-Novarica.
This contrasts with the U.S., where a growing number of merchants have introduced credit card surcharges without significant consumer pushback. Surcharges, presented as a "
"In a time of high inflation and growing sensitivity to pricing, there isn't a worse time to add a 2% price uplift," Ubaghs said. "The consumer backlash could be high. Alongside credit card reward points, many consumers rely on credit cards to manage their personal liquidity. It's easy to picture how surcharging will be seen as price gouging on already frazzled consumers."
Surcharges for online credit card purchases could annoy consumers who don't have an alternative lower-cost way of paying online. Canadian debit cards can be dual-badged with Interac, the country's debit card network, and either Mastercard or Visa. Interac-only debit cards can only be used online if they are loaded into Apple Pay or Google Pay wallets and if e-merchants accept these wallets.
"The problem is that not all Interac cards are dual-badged," said Ubaghs. "Using debit cards for online or app-based payments isn't always an option for Canadian consumers. If some customers have no option but credit cards for e-commerce and get hit with surcharges, the backlash could be negative."
Regulations require businesses to make it very clear upfront including signage on windows that they surcharge for credit card payments. "This isn't that far off saying 'cash or debit only.' Highly competitive merchant segments like coffee shops would be reluctant to do this," said Ubaghs.
This attitude was reflected in a September 2022 member survey by the CFIB, which found that only 19% of respondents plan to introduce surcharging, while another 26% would do so if their competitors or suppliers did so. Of the remainder, 40% aren't sure yet if they will surcharge, while 15% don't intend to do so, the survey found.
The Canadian government wants to reduce credit card interchange and protect cardholders' rewards, said Adrienne Vaupshas, press secretary for the Office of the Deputy Prime Minister and Minister of Finance. "The government is committed to lowering the cost of credit card fees in a way that benefits small businesses and protects existing reward points for consumers," she said.
However, the government currently lacks the authority to regulate card acceptance fees in a similar way to the EU and Australia. Canada's Payment Card Networks Act only enables the government to regulate for fair and transparent business practices by the card networks, such as posting their network fees and interchange rates online and providing advanced notice about rate changes.
In her Fall 2022 Economic Statement, Finance Minister and Deputy Prime Minister Chrystia Freeland said that Canada's government intends to "negotiate with payment card networks, financial institutions, acquirers, processors and businesses to lower credit card transaction fees for small businesses." Freeland also published draft legislative amendments to the Payment Card Networks Act, and said that if the government doesn't reach an agreement with the payments industry, it will introduce legislation in 2023 to regulate credit card transaction fees.
It will be challenging for the government to introduce legislation lowering interchange for smaller businesses while protecting rewards, according to Kelly.
"Canadians are addicted to their credit card rewards programs, but don't want to pay for them via surcharges," Kelly said. "Consumers don't realize they are paying interchange fees embedded in everything they buy. They think their credit card rewards are funded by their annual card membership fees or by the interest they pay to their issuers, when their rewards are actually funded by interchange."
According to Kelly, Canadians don't mind paying fees provided these fees are hidden and they don't have to hear about them. "But they get upset when they realize they are paying surcharges to fund a rewards program for air travel that they aren't going to make," he said.
Whether or not consumers opt for cheaper payment methods will depend on individual consumers and their credit card, according to Alex Vronces, executive director of Paytechs of Canada, a nonprofit association. "If I get 3% cash back on groceries, but my grocery store surcharges 1.5%, I still come out ahead using my credit card," he said.
Before surcharges were banned in 2018, surcharging was popular with U.K. airlines and holiday companies. British consumers were faced with surcharges for using credit cards and getting not just rewards and grace payment periods but also additional consumer protections like flight cancellations, or forgo all that and see money leave their account instantly after paying by debit, said Zil Bareisis, head of retail banking at Celent.
"In Australia, not only is card surcharging totally pervasive, but banks and card companies have recovered all lost revenues from lower interchange by introducing extra cardholder fees and charges and by cutting credit card airline rewards drastically," said Grant Halverson, managing director of McLean Roche in Melbourne, Australia. "Consumers lost out badly."
