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What you need to know about Canada's new credit card surcharge

As digital payments have increased in Canada, credit cards have increasingly become the payment method of choice for many consumers. This has been especially true since the beginning of the pandemic because of the reduction in the use of cash. Credit cards' convenience and reward points are too attractive to pass up. Yet, small businesses and retailers don’t always have the same positive opinion of credit cards as their customers. And for good reason—they have to absorb the cost of processing credit card payments (usually 1.5% to 3.5%).

This is poised to change with new regulations regarding credit card transaction fees which came into effect on October 6, 2022—the result of a class-action lawsuit led by business against Visa and Mastercard due to years of having to shoulder the cost of pricey credit card transactions. 

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The problem with surcharges

Credit card providers like Visa and Mastercard have long charged merchants a processing fee of 1% to 2.5% per sale. Of these fees generated, the banks that issue these cards also get a share. These charges – called interchange fees – cover the cost of accepting, processing, and authorizing transactions, and until now, businesses were not permitted to pass the cost on to customers.

In 2020 alone, businesses paid nearly $8 billion in processing fees, a sum that has only grown in the subsequent years due to the online shopping boom experienced as stores and retailers gradually opened their doors again in 2021 as lockdowns were lifted.


A change in surcharge regulations

The settlement of a lengthy class-action lawsuit involving major credit card providers like Visa and Mastercard changes this dynamic. These industry leaders had to pay out $188 million to businesses as a rebate for interchange fees collected over the last ten years. Significantly, businesses will now have the option of offsetting credit card processing fees by passing the surcharge on to customers. So while credit card providers will continue to charge and collect interchange fees, merchants can charge the customer that amount—saving the merchant’s profit margin from being eroded as a result of offering their customers the convenience of paying by credit card. 

However, while this may seem like a welcome move for merchants, only about 19% of businesses are likely to implement this—according to the Canadian Federation of Independent Business (CFIB). This is understandable, given that customers may not be happy to spend more for merely opting to swipe their credit card rather than pay by another method. In fact, about 65% of respondents in the same survey indicated either that they weren’t sure whether they would charge their customers or were sure that they wouldn’t.


Do small businesses welcome the new regulations?

Small businesses have long struggled to balance their profit margins and customers’ payment method of choice. And, while the ability to surcharge customers is not the ideal solution for merchants—who would prefer a significant reduction in the fee—it will help them deal with the ever-increasing cost of operations, especially in the current economic environment of soaring inflation. Despite these advantages, not all merchants see this as a positive move. Several small businesses have protested that making merchants the decision makers behind who picks up the tab for interchange fees is not the solution to the problem. Instead, they are pushing for the federal government to make good on its long-standing promise to reduce transaction fees.

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The road ahead for credit card transaction fees

As the Canadian government continues to seek out ways of reducing processing and interchange fees, we can expect to see changes in the landscape of commerce over the coming years. 

While the new rules have come into effect, the change on the ground will not occur overnight. Mastercard, for their part, will allow businesses to surcharge either the prescribed fee or 2.4% (whichever is lower), while Visa has yet to confirm their new policy. As for American Express – they weren’t named as part of the aforementioned lawsuit, so their response remains to be seen.

Businesses looking to take advantage of the ruling will first have to register with credit card providers and inform them 30 days before they intend to implement the surcharge. Further, they won’t be permitted to charge more than what they have to pay the providers (2.4%) and will also have to inform customers of the surcharge at the time of payment—by displaying a sign that alerts them of the surcharge and by adding it to the customer’s receipt. Additionally, these rules will not be rolled out in Quebec, where the Consumer Protection Act prohibits such surcharges. 

And for those who use cash, debit, or prepaid cards – you’re off the hook for now. Despite merchants still being hit with processing and handling fees for these payment methods, the new charge is only targeting credit cards at this time.


The last word

So when should you use your credit card going forward? Aside from the obvious benefits of accumulating cash back or rewards points, most credit cards still contain other benefits that come in handy when making large purchases - such as purchase protection insurance or extended warranties. You won’t get this sort of coverage when paying with debit or cash. In addition, your cash back will come out of the interchange, eventually covering part of the fee and making the extra charge less painful.

If you’d rather avoid a retailer’s credit card surcharge, there are other options available. Because businesses are given the choice to impose the surcharge or not, you can always decide to spend your money somewhere that won’t tack on an extra percentage to your purchase. Another thing to consider is owning a mix of different credit cards. Due to the fact that merchants have the option of applying the processing fee at the brand level (ie Mastercard, Visa), card-specific level, or not at all, having a mix of premium and non-premium credit cards at your disposal can give you more agility when it comes to avoiding the surcharge.

The credit card surcharge landscape could change in the future, as the federal government explores ways to reduce interchange fees and strike a balance between the needs and interests of merchants, card providers, and customers. In this way, the government may borrow lessons from the European experience, where—since January 2018—interchange was lowered by regulation. At this time, merchants aren’t allowed to charge European Union (EU)-issued credit cards a surcharge. This move has been effective in driving down retailers' costs while still supporting payment innovation.

What do you think of Canada’s new rules around credit card processing fees? Let us know in the comment section below.


Also read:

Canada's 8 best no-fee credit cards

8 hidden credit card fees you should know about

Canada's 13 best no foreign transaction fee credit cards