Right now in Canada you usually pay the same price to a retailer for goods and services whether you pay by cash, debit, or credit. On the surface this seems like a good thing. However, when we scratch the surface, we see inefficiencies that boost prices. Planned changes to these price rules could create different pricing for different payment methods, but whether consumers will benefit is still unclear.
When you pay with a credit card, the retailer has to pay between 1.5% and 3% of the transaction amount to the credit card company. The cost of all the wonderful credit card reward schemes we enjoy comes out of these fees charged to retailers.
Retailers have to raise their prices to compensate for the fees they pay to credit card companies. The catch is that everyone has to pay these higher prices, even those who pay with cash. In effect, people who pay cash are subsidizing the credit card rewards and cash-back schemes. But only some of the retailer fees flow back to consumers as rewards; the rest goes to banks and credit card companies.
Retailers are upset about new credit cards that require them to pay ever-higher fees. These higher fees pay for the increasingly generous credit card rewards consumers enjoy. But more of these fees are kept by banks and credit card companies, which causes the prices of goods and services to rise.
So, there are two problems. One is cash-paying consumers unfairly having to subsidize credit card users. The other is the growing fraction of transactions that get retained by banks and credit card companies that must lead to higher prices for consumers.
Retailers argue that they should be able charge consumers extra for credit card purchases. On the surface this would seem to solve both problems. Retailers in competitive markets would advertise slightly lower prices. This would end the subsidy by cash-payers, and credit card users would pay for the credit card fees. The high-fee credit cards would suddenly be less desirable to consumers if they had to pay 3% extra for each transaction. Cash, debit, and lower-fee credit cards would suddenly look much better.
However, why should we think that retailers would pass on just their actual costs for credit card fees? Why wouldn’t they charge much higher fees if they could get away with it? Consumers are driven by advertised prices and may not be as sensitive to extra charges at the point of sale. In the absence of rules to prevent this kind of abuse, particularly by monopolies and near-monopolies, there is no reason to believe that consumers would be any better off if retailers could charge extra fees for credit card transactions.
The Competition Bureau is challenging the rules credit card companies impose on retailers preventing them from charging extra fees for using credit cards. There is a lot at stake and it isn’t clear how much freedom retailers might get to charge extra fees. If retailer freedom is limited, consumers are likely to benefit, but the situation is less clear if retailers are free to add surcharges as they please.