Why credit card fees could rise

Consumers like paying for goods and services with rewards credit cards for good reason. They can get travel points, free groceries and even cash-back on their purchases. But will they like doing that if it starts costing them an extra charge? We might be about to find out. The benefits a cardholder receives usually come with a cost to the merchant because the credit card companies charge retailers to use them, and they charge more when customers use the fancier premium cards. Now we need to be prepared for that charge to get passed on to you and me. In separate recent class action lawsuit settlements, Visa and MasterCard have agreed to allow merchants to levy a surcharge on premium-card customers. Here’s what you need to know:

How merchant fees work

There is a reason retailers prefer you pay in cash. When a consumer uses a credit card to make a purchase, the credit card company takes a slice out of the transaction. This is known as the “merchant discount fee”. It’s the difference between what is charged by the merchant and what they actually get paid by the credit card company. Regular credit cards typically cost the merchant 1.50% in fees whereas a premium card can cost up to 2.50%.

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Merchants have been unhappy

As part of their agreements with Visa and MasterCard, merchants can be charged a higher discount fee if a consumer pays with a premium credit card. This is imposed by the credit card company to offset the rewards those premium cards offer to the consumer. Merchants have been unhappy with this arrangement for a few reasons:

They can’t refuse premium cards. A key part of the agreements between the credit card companies and merchants is what’s known as the “Honour all cards” policy. What this simply means is that a merchant has to allow a consumer to pay with any credit card issued by the card company.
Merchants have not been allowed to impose a surcharge on premium card transactions. Another aspect of the agreements between merchants and Visa/MasterCard is that the merchant has not been allowed to pass along the higher discount fee to the consumer in the form of a surcharge.

What’s involved in the settlements

Without admitting to any wrongdoing, both Visa and MasterCard have separately agreed to pay $19.5 million each to merchants as part of class action lawsuits. The lawsuits alleged that banks and credit card companies illegally fixed the price of fees paid by merchants who accept Visa and MasterCard. Once the settlements have been approved by the courts, merchants in the Visa and MasterCard networks will ultimately have the option of charging consumers a surcharge if they pay with a premium credit card. According to one media report, the surcharge is expected to be capped at 2%.

Consumers are not likely to be directly affected in a big way

Will the settlement directly affect consumers? In the short term, no. First, it will take 1.5 to two years for the settlement to take effect. Even then, it’s not expected that most retailers will start levying surcharges on premium card users. Dan Kelly, president of the Canadian Federation of Independent Businesses, says that in his opinion, the vast majority of merchants won’t decide to add a surcharge: “It takes a lot to get a customer into your store on your website. It takes even more to get them to the point of purchase. Most merchants would not want to take the risk of losing a customer by frustrating them over the way they choose to pay.” Kelly notes that for merchants who use debit from Interac, where “surcharging” is already permitted, only a “handful of very small merchants” such as corner stores and delis actually impose an added fee for consumers.

Credit card fees you didn’t know you were paying

A change in the balance of power between card companies and merchants

Even though most merchants aren’t likely to impose surcharges, just the possibility that they could give them a certain degree of clout against the credit card companies. Kelly suggests that if the card companies started raising fees again, merchants could respond “by slapping on a temporary surcharge to send a message to the industry.” It could be a potent message, because if there’s a surcharge on premium cards, competing forms of payment (cash and debit) become more attractive for the consumer. Reidar Mogerman, a lawyer who represented the lead plaintiff in the class action suit, says that “changing the no surcharge rule is very important because it can create competitive pressure that reduces the overall amount of” fees paid by merchants. “In the past, as is true with all costs, some merchants were able to pass on some fees. Surcharging is different because the merchant can steer some consumers to a different payment method and thereby avoiding the fees altogether.” Long story short, the ability to surcharge might keep the fees charged to merchants in check. And at least in theory, that should filter through to consumers as well.